With the dust not yet settled on the U.S. Department of Labor’s fiduciary rule, finalized last April, agents and advisors are questioning whether and how their practices can remain viable in the retirement plan arena.
Put that question to members of the Million Dollar Round Table — an association of top-producing life insurance and financial service professionals that held its annual meeting in Vancouver, B.C., June 12-15 — and you’re likely to hear a resounding “yes!”
Optimism about the future of retirement planning was an overriding theme in one-on-one interviews with LifeHealthPro and National Underwriter Life & Health held at the annual meeting with a select group of MDRT members, including those from United States, the United Kingdom Canada, New Zealand and South Africa. The wide-ranging discussions explored trends buffeting retirement advisors globally such as the tightening compliance requirements, paired with an evolution in savings and investments vehicles that (with some exceptions) are helping pre-retirees and those in retirement achieve their objectives while availing advisors of more flexible planning vehicles.
Catering to the worksite
For Cornerstone Financial, the sweet spot is small businesses, in particular employer-sponsored 401(k) plans. Now accounting for 35 to 40 percent of its practice revenue, the worksite market is expected to garner half of firm revenue in the coming years. (The company also generates income from life insurance sales and managing non-qualified plan investments for individuals.)
Why the heavy focus on qualified plans?
“One attraction is repeatability: It’s easy to do plan implementation on a large scale,” say Adam Rex, vice president of risk management at the U.S.-based firm. “You can do a retirement educational meeting for a 100-person company within an hour. To do this individually would take a lot longer.”
To be sure, Cornerstone’s principals — Rex runs the firm with his brother and Dad — generate additional business helping senior-level executives prepare for retirement with supplemental, nonqualified plans. Among them: life insurance-funded deferred compensation plans, executive bonuses and supplemental executive retirement plans.
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New Zealand’s KiwiSaver
Employer-sponsored retirement plans also are a growing source of revenue for AdviceFirst, a practice with 10 offices in New Zealand. KiwiSaver, a popular retirement savings vehicle, is like the 401(k) a defined contribution plan that receives dollars from both the plan participant and the employer.
Unlike the 401(k), contributions are limited to 3, 4 or 8 percent of an employee’s pay. The KiwiSaver also is taxed like a Roth IRA: Contributions are made on an after-tax basis, then accumulate and are distributed at retirement tax-free (though as a lump sum, not an annuity).
Plan participants (“members”) also receive an annual, government-paid tax credit. As with a traditional IRA in the United States, younger participants can use the plan to help pay for a first home without incurring a tax penalty.
At retirement, individuals can draw on not only these voluntary accounts, but also the New Zealand Superannuation (NZ Super): a government pension paid to “kiwis” (a nickname for New Zealanders) over age 65.
Kick-started in July 2007, the KiwiSaver represents a growing revenue stream for advisors to participants looking to maximize investment yields through active management of the accounts during the accumulation phase. At retirement, many are also turning to advisors for help in rolling over the accounts to other investment vehicles offering superior returns and/or a guaranteed retirement income stream.
“More and more people are talking to advisors about what to do with these retirements funds, particularly those with 6-figure accounts, says Peter Chote a director at AdviceFirst. “In years past, there was less planning around these accounts because the amounts saved were comparatively insignificant.”
Savings plans in Canada
The same can’t be said of Canada’s registered retirement savings plans, called RRSPs, which are tax-advantaged savings and investment accounts that have been on the books since 1957. Established to supplement employer-sponsored registered pension plans, the vehicles enjoy the same tax treatment as a conventional IRA or 401(k): Pre-tax contributions grow tax-deferred, then are taxed at distribution.
Encompassing several account types — the accounts can be set up as an individual, spousal or group/employer-sponsored plan — RRSPs can be invested in both equities and fixed income assets. At retirement, many Canadians opt to roll these accounts over to a segregated fund registered retirement income fund, called an RRIF, held by a life insurance company.
The equivalent of variable annuities in the United States, segregated funds are guaranteed by the life insurer (the guarantee varying between 75 and 100 percent of the original investment) if held for a required length of time (typically 10 years).
Aurora Tancock, a financial planner and principal of Aurora Tancock Financial Services in St. Catharines, Ontario, derives between 50 to 75 percent of her business from product sales and advising on these accounts, plus mutual fund RRIFs. Tancock’s practice has matured in tandem with her boomer-age clients, and so her focus has increasingly shifted from nest egg accumulation to retirement income planning.
“Over time, I foresee these products playing a larger role in my practice,” says Tancock. “There’s also growing demand among retirees for tax-free savings accounts.”
Launched in 2009, tax-free savings accounts function like the American Roth IRA: contributions to the accounts (limited, as in the U.S., to $5,000 annually for those under age 50) are made with after-tax dollars, and earnings are not taxed at distribution. But the tax-free savings account enjoys a few advantages over its U.S. counterpart: Tax-free withdrawals of earnings come with no strings attached (e.g., no need to wait to age 59 ½); contributions to the accounts are not income-dependent; and these contributions can be carried forward (if you don’t deposit $5,000 into the account this year, you can stash away $10,000 next year).
(Retirees looking to generate a comfortable income stream in their golden years, added Tancock, can also draw on two other sources of income. One is the Canadian Pension Plan, an arrangement to which both an employer and employee contribute equally and that (depending on the employee’s contribution) pays from $3,500 to $53,600 annually. Also available to retirees is Old Age Security, a guaranteed income supplement available beginning at age 65.)
Retirement in the United Kingdom
Roth IRA-like vehicles also are much in demand in the United Kingdom, where the Financial Conduct Authority kick-started individual savings accounts, called ISAs, in 2013 as part of its Retail Distribution Review: A set of rules instituted to bring more transparency and fairness to the delivery of investment advice.
Under the country’s old pension scheme, individuals could take part of their savings at retirement as a lump sum, the balance paid as a fixed interest rate annuity — a disadvantage in a low interest rate environment. Post-Retail Distribution Review, ISA holders can stop, start or modify the tax-free annuity income as needed.
“You now have the flexibility to change the payout to suit your circumstances — that’s a big plus,” says Alessandro Forte, an advisor and CEO of London-based Forte Financial Group UK. “Funds not taken as income can remain invested. And any ‘uncrystallized’ benefit — monies not taken as income should the account holder die — can be passed on to beneficiaries free of income and capital gains tax.”