Increased Attention To Distribution Planning From Retirement Plans
Planners are putting increased attention on distribution planning for their clients retirement plan assets, according to Rebecca S. Hanna, vice president advanced marketing for GE Financial Assurance Companies, speaking at a breakout session during this years LIMRA Advanced Sales Forum here.
“Demographics show this is becoming an growing issue as baby boomers come closer to retirement age,” she said. Furthermore, with the enormous amount of assets sitting in qualified plans, advisors must begin considering how those assets will be distributed.
“Right now it is estimated that there is in excess of $10 trillion in qualified plans–thats a lot of money and a tremendous opportunity for the industry,” she said.
To illustrate the importance of understanding the fundamentals of distribution planning, Hanna gave a basic example: Assume an IRA owner has an account value of $1 million and intends to postpone distributions from the account until he is age 70 1/2–at which time he will take minimum distributions. He has named his daughter and grandson as beneficiaries of his IRA.
Under this scenario, he will receive distributions until death, and his daughter and grandson will then receive distributions based on the life expectancy of his daughter. Assuming an 8% annual return, the total amount distributed is just over $9 million dollars.
An alternative here is to split the IRA into two equal parts, Hanna explained. Now, his daughter will receive income from her IRA while the grandson will receive income from his IRA. Using the same 8% assumed rate of return, the total amount distributed now exceeds $27 million.
While Hanna admits that 8% may be an aggressive rate of return to illustrate, “by splitting the IRA into two IRAs, were allowed to use both life expectancies rather than just one.” The result is increased deferral and increased total distributions, she said.
But IRA owners are not the only prospects when it comes to distribution planning. “How many of you have had agents come to you with questions from clients who have inherited IRAs?” The beneficiaries of qualified account balances need to know what their options are, Hanna explained.
And while recent regulations simplified retirement plan distribution planning, Hanna said that agents working in this market still need to be very careful when advising clients of their options.
One area that agents who are new to this market need to familiarize themselves with concerns the required beginning date for qualified retirement plan distributions. Many planners assume the required beginning date is equal to the owner/participants age of 70 1/2. Rather than focusing on that age, however, planners need to take a good look at the definition of the required beginning date, Hanna said. This may be an area of confusion for both planners and clients, she added.