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Fight Is Brewing Over Tax Breaks for Annuities

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The American Society of Pension Actuaries (ASPA) is gearing up to

make sure that a bill designed to create a tax break for annuities

purchased outside of a traditional employer-sponsored retirement plan

doesn’t become law next year, at least the way it is written


The Retirement Security for Life Act, H.R. 4849, would permit a tax

exclusion of up to 50% of the taxable portion of a lifetime payment

from these types of nonqualified annuities. ASPA wants to broaden the

bill to include qualified plans. “We are working with other

members of Congress who are interested in an alternative,” says

Brian Graff, ASPA’s executive director. He declined to say which

members of Congress, but did note the effort has bipartisan support.

“This should be about the concept of annuitization?not

favoring one particular product over another.”

H.R. 4849 is designed to help the large portion of the U.S.

workforce that lacks access to pension coverage, according to a

spokesman for Americans for Secure Retirement <a


a coalition of the bill’s promoters that includes the American Council

of Life Insurers and National Taxpayers Union. A high percentage of

buyers of nonqualified annuities earn less than $75,000 per year,

according to spokesman Kevin Bruns. He says that the bipartisan bill,

sponsored by Rep. Nancy Johnson (R-Connecticut), will likely be

reintroduced when Congress gets back to business in


The SEC Watches the Clock


legislation can lie fallow for many months, the Securities & Exchange

Commission has moved decisively on another initiative that affects

retirement plans. Retirement planners are eyeing warily the proposed 4

p.m. (Eastern Time) close for mutual fund transactions and the

proposed 2% redemption fee on shares redeemed or exchanged soon after

their purchase to prevent price arbitrage or market timing.

Market timing opportunities are not limited to international funds.

“Mutual funds that invest in small-cap securities and other types

of investments which are not frequently traded, including high yield

bonds, also can be the targets of market timers,” the SEC says.

While market timing is not illegal, the agency notes that it “may

dilute the value of long-term shareholders’ interests in a mutual fund

if the fund calculates NAV (net asset value) using closing prices that

are no longer accurate.”

New York Life Investment Management (NYLIM) wants the redemption

fee to be limited to participant-initiated exchanges, an affirmative

decision to trade out of a fund, and that an exception be made for

financial emergencies, such as cashing out of a 401(k) plans to pay

for a necessary expense. “You are not going to be market timing

by taking a loan from a plan,” says Mark Niziak, NYLIM’s

Retirement Plan Services’ director of ERISA/consulting services.

“If someone needs a hardship withdrawal, that is not market


With the 4 p.m. hard close proposal, third-party administrators

would have to get a trade in to a mutual fund family by that hour, so

trades would have to be reconciled as early as noon, or earlier if the

firm is on the West Coast, Niziak notes.

Judy Schub, managing director of the Committee on Investment of

Employee Benefit Assets (CIEBA), a committee of the Association for

Financial Professionals, says the 4 p.m. proposal is a

“disadvantage” to plan participants because “it creates

different classes of investors” who would either have to shut

down trading very early or bear market risk for 24 hours. One positive

note, however, according to a CIEBA survey, is that more than

two-thirds of large retirement plan sponsors have taken action to

control market timing in their 401(k) plans.

The SEC is considering alternatives to its 4 p.m. proposal, which

could be ruled on as early as this fall. One alternative would allow

administrators to have time and date stamps so they could lock in a

trade until 4p.m.

Link to market timing comments filed with

the SEC: <a


Link to hard 4 PM close comments filed with the SEC: <a


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