Book Review: "The Retirement Savings Time Bomb... and How to Defuse it"

by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
http://www.retirementandinsurance.com

Thank goodness Ed Slott, author of “The Retirement Savings Time Bomb… and How to Defuse It,” has a good sense of humor, because while he looks harmless, his message is nothing short of apocalyptic. Your hard-saved retirement plan is at risk from something worse than inflation or stock market gyrations – the burdensome taxes you and your loved ones will have to pay once you start living off your savings or try to pass them on to your heirs.

Ed Slott, a nationally recognized tax expert, gives us a startling wake-up call – with careless planning, we can not only miss out on potential tax benefits, but punish ourselves (and heirs) with excessive tax bills. There are literally hundreds of “loopholes” and planning techniques mentioned in the book. It is an exceptional reference volume for the professional planner and the retiree alike. There is just enough information here to be dangerous for the person who thinks they can “do it themselves.” A word of caution: tax rules change frequently so don’t try these techniques without the close cooperation of your advisor and tax planner.

Throughout the book, Mr. Slott exposes us to the bewildering tax maze that applies to our retirement plans. It’s easy to get overwhelmed, but I advise the reader to not be alarmed, because many of the worst pitfalls can be easily avoided. Secondly, some of the complex strategies may never apply to your personal case. Nevertheless, it’s useful to open your eyes to some of these issues, just in case.

This book is like the manual for your DVD player. You probably won’t read it cover-to-cover, but you certainly should have it handy when:
- you open an IRA account
- you change jobs
- your spouse or parent dies
- you are setting a retirement date
Mr. Slott’s “Professional Publications” and “IRA Information Websites I Use” resources are solid gold. The appendices, likewise, are valuable, especially the glossary.

My clients would love to have massive IRAs that they don’t expect to exhaust in their lifetimes. Unfortunately, most people are more concerned with just having enough in this lifetime alone rather than maximizing their kids’ inheritance. Examples of valuable gems in the book include:
- Net Unrealized Appreciation (NUA): If your company retirement plan allows you to buy company stock, you can segregate it when you retire and possibly pay a much lower tax rate on it;
- Stretch IRAs for Beneficiaries: This simple concept is repeatedly emphasized as a way to allow a second generation of IRA beneficiaries drag out the requirement that they pay taxes on their inheritance while letting the account value compound over a longer period of time;
- Life Insurance Strategies: Mr. Slott is a vocal proponent of retirees holding life insurance as a means of leveraging assets and providing more options to both the spouse and children. For large estates, life insurance proceeds are an essential resource to pay estate taxes.
- Non-spouse Beneficiaries: We automatically assume that our legally married spouse is the logical beneficiary to our retirement plan. That’s not always the case, nor is it ever an option for gay and lesbian couples.
- Contingent Beneficiaries: Always name a contingent beneficiary to avoid the possibility that your estate will inherit your IRA, and also to give your spouse the option to disclaim the inheritance.
- Keep copies of your beneficiary designation forms since you can’t assume that your financial institution or bank will have them when your heirs need to prove that they are the rightful beneficiaries.

Mr. Slott was gracious enough to take the time from his busy schedule to speak with me on March 9, 2011:

[Richard O’Boyle] One of your most important points in the book is your emphasis on properly designating beneficiaries. When you name a non-spouse as a beneficiary of a non-IRA retirement plan (either because your spouse predeceases you, or you are not legally married, for example), what are the issues to consider?

[Ed Slott] First of all, if you have a non spouse, they don’t have the same benefits and legal protections as a spouse. Even if you are remiss or sloppy, the proceeds of an account will likely go to the spouse any way. If you want a person to get the plan, make sure that they are properly listed as the beneficiary on the form. Everybody thinks that the banks or financial institution will have a copy of the form when the time comes, but institutions can be very sloppy. If the bank doesn’t find that form, big tax benefits can be lost, and your intended beneficiary may not ultimately get the account. A beneficiary form trumps the will and any other legal documents. When we think of “non spouse beneficiaries” we often think of our children – and I got this point from your blog – very few people think “unmarried partner”… a gay partner is a non spouse beneficiary. Even if they are married under state law, under the federal tax code, they aren’t. The most important point for same sex partners is to make sure they name each other as beneficiaries on the form.

[O’Boyle] Trusts can be inordinately complicated, even for the experts, which is why I suspect many families close their eyes to their value. How can non-married couples preserve their wealth without getting overwhelmed by complex documents and expensive legal fees?

[Slott] Again, using beneficiary forms is the most direct and foolproof was to make sure your wishes are followed. Maybe some other family members don’t approve of your relationship. Trusts are a way to make sure the property goes to your partner. If your main concern is to make sure they get it, it can get done simply through the beneficiary form. Trusts are for other issues, not necessarily tax issues. For example if the intended beneficiary is a minor, disabled or incapacitated, or it is a beneficiary who can’t handle money. If that’s an issue then you go the trust route. If these aren’t issues, then you might not need a trust. The beneficiary form is iron clad and it trumps even what may be stated in a will.

[O’Boyle] There actually still are plenty of people who have pensions provided by their unions or employers. How can gay couples get the same benefits as legally married couples when it comes to survivorship and continuation of pension benefits?

[Slott] The only way is to name them as a beneficiary. Now, I’m not an expert in all these plans and you will have to go plan by plan so see if you can even name a non spouse as a beneficiary. Another way to do it is to take some IRA or pension money out – you will have less pension benefit – but you transfer that money into a life insurance policy and the surviving partner gets a chunk of money through life insurance. That’s a much better way to make sure there is money than trying to go through a complicated pension plan.

[O’Boyle] Nobody knows where tax rates are headed, but the conventional wisdom is that they are headed higher. If rates increase dramatically, where should people shift their future retirement savings?

[Slott] That’s an easy one: a Roth IRA, because a Roth IRA is a hedge against the uncertainty of tax rates going higher. You don’t have to worry if tax rates go to 50 or 60%. You don’t have to worry because you have locked in a tax free asset. Of course you pay the taxes up front now. It really doesn’t matter how high they go. You can set that up right now.

[O’Boyle] I can count the number of “insurance positive” celebrity advisors on one hand. By that I mean the number of financial professionals who get significant air time who are strong proponents of cash value life insurance as a part of a retirement plan. Why does cash value life insurance get such a bum rap?

[Slott] I’m not an insurance guy, nor am I am expert in stocks, bonds or investments. I like life insurance as a tax vehicle. I believe it’s the single best benefit in the tax code because it gives you the ability to take small amounts of money and leverage it tax free. All I care about is the tax benefits and if it pays out at death. The kind of life insurance is up to you and your advisor. Some people just want the most insurance for the least money. But as you get older you probably will be better off with cash value life insurance. The term premiums get astronomical and you have nothing to show for it.

"The Retirement Savings Time Bomb... and How to Defuse It" is available from Amazon.com.

(c) 2011 Prism Innovations, Inc. All rights reserved.

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Digesting Health Care Reform

So we hurry up and wait.

That is perhaps the most apt description of how self-insured employers and their business partners have adapted to the new health care law and the ongoing reform process it has triggered.

For obvious reasons, we saw a flurry of activity immediately after the passage of PPACA to first determine what was actually in the legislation and then to move forward with compliance planning. This stage seems to have largely passed and now we are in an extended waiting period until 2014, which is when the health insurance exchanges are scheduled to come on-line and the next wave of regulatory requirements, such as the employer mandate, are upon us.

With that timeline framed, let’s take a look at where things stand today and possible legislative/regulatory developments over the next three years.

Clearly there is curiosity with regard to self-insured employer reaction to PPACA as we approach the first anniversary of the law’s enactment. A recent outreach effort to employers of various sizes generated feedback that concluded the law has not created any significant hurdles for them to continue to self-insure, at least in the short run.

The biggest issue seems to be whether or not employers want to retain grandfather status of their health plans. Although unscientific, the feedback suggests it is almost an even split regarding grandfather status decision.

We also received feedback on other issues such administrative burdens, plan design changes, wellness programs and stop-loss cost. When this information was aggregated, the observation is that while there is general discomfort with adapting to the new law, employers are sticking with self-insured health plans, at least for time being.

More on the longer term employer view later, but first we need to stay focused on health care reform developments that will play out in the coming weeks and months, which could influence events before 2014.

Separate HHS and DOL reports dealing with self-insured health plans will likely be released this month and despite efforts to ensure that the regulators are fully educated about self-insurance, there is probably a better than average chance that these reports will contain negative commentary.

Key members of Congress and their staff have already been briefed in advanced about possible biased findings, and we have been generally encouraged by the supportive responses. That said, we could very well see self-insured health plans being one of the focal points in future legislative developments if official government reports conclude that such plans impede overall health reform implementation efforts.

The most likely threat would be legislation to restrict smaller employers from self-insuring, similar to a provision actually included in an early version of the PPACA legislation that SIIA was able to have stripped.

As previously reported, the IRS is also looking to define stop-loss insurance, which was an unanticipated consequence of the health care law. We expect a face-to-face meeting any day to get a better understanding of the agency’s thinking and I will be sure to publish a recap of this meeting, so be sure to check back regularly.

It was interesting to hear President Obama’s comments at the National Governors Association meeting this week that he is agreeable for moving up the timeline for states to be available to apply for waivers to the health care law if they develop their own reform plans that achieve the same access and affordability outcomes as the administration anticipates through PPACA implementation.

This offer was made in response to complaints from numerous governors that the new health care law will greatly increase costs to the states due to expanded Medicaid obligations. And of course, it was classic Obama rhetoric – a politically appealing sound bite that doesn’t square with reality.

Of course, the hitch with this offer is that a state-based plan must meet an artificially high bar for outcomes in order to be approved, so the reality is that it is unlikely that any waivers will actually be granted. As such, it is probably premature to be concerned about ERISA preemption issues, but we will certainly keep an eye on things.

In a bit of positive news, some of our reliable sources in Congress have signaled a renewed interest in association health plan (AHP) legislation, which would include a self-insurance option. They tell us, however, that the one hurdle to overcome is the perception that AHPs would contribute to adverse selection and therefore compromise larger health care reform objectives.

We are working to address these concerns now, so stay tuned for a possible return of AHPs as a serious topic for discussion on Capitol Hill.

Then there are the legal challenges to PPACA. Just today, Florida Federal Judge Robert Vinson put the Obama on notice that they have seven days to file an motion for expedited appellate review of the individual mandate constitutionality question or 26 state will be allowed to hold off on any PPACA implementation actions pending a final ruling by the Supreme Court. This has made things even more interesting.

There will be more short term health care reform legislative/regulatory developments for sure, but I thought it would be useful to highlight those on the radar screen today.

Now let’s return to the longer view of PPACA from the self-insured employer perspective. The real uncertainly arrives in 2014 when companies are required to provide health coverage or pay a penalty (play or pay).

From talking with several employer representatives, we have learned that most companies have been running numbers to test both scenarios, but are generally keeping tight-lipped about any conclusions at this early date. So essentially, the self-insurance marketplace has moved quickly to adapt to the new health care regulatory environment and now the waiting begins for potentially bigger shoes to drop going forward and the resulting reaction from self-insured employer and there business partners.

Settle in…it’s going to be a long ride.

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Overriding an NAIC "Veto" In Congress

It’s not often that the self-insurance/ART industry successfully pushes back against the National Association of Insurance Commissioners (NAIC) on an important legislative/regulatory matter, but I am pleased to report one initial small victory.

For the past few years, I have been involved in lobbying for federal legislation that would modernize the Liability Risk Retention Act (LRRA). This legislative initiative has included three basic objectives: 1) allow risk retention groups to write commercial property coverage; 2) establish standardized corporate governance standards, and 3) create a new federal arbitration mechanism that RRGs can utilize in cases of disputes with non-domiciliary regulators.

This last objective has attracted predictable opposition from the NAIC and individual regulators warning that such federal oversight would compromise state-based regulation of insurance. This is a canard, of course, because our approach actually strengthens state regulation by allowing for the validation of decisions made by an RRG’s domiciliary regulator.

In spite of the this common sense analysis, the NAIC has demonstrated de facto veto power in Congress on getting LRRA legislation passed with an arbitration provision, blocking bill introduction last year in the Senate. Apparently, however, this veto power now has some limits.
It was recently confirmed that Senator Jon Tester (D-MT) will introduce LRRA legislation this session including the arbitration provision. This is notable because Senator Tester had resisted supporting this initiative during the last Congress in deference to home state insurance regulator Monica Lindeen who had been pressing the NAIC party line.

We are not sure why Senator Tester has chosen to change course on this, but the heavy lobbying by many of his constituents, including the Montana Captive Insurance Association (MCIA), has certainly contributed to this positive momentum.

Of course, this is just one development in a lengthy and difficult process to get the legislation passed and signed into law. But the fact that the NAIC has not been able to successfully exercise a veto at this early stage confirms that it is possible for our industry to make good things happen despite state regulator angst.

We fully expect to bump up against NAIC opposition as the congressional session continues. Stay tuned to see how the balance of power tilts.

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A Fresh Look at Mandating Health Insurance Coverage

Requiring individuals to maintain health insurance coverage is a good idea. There, I said it despite my libertarian leanings.

Yes, an individual mandate may be unconstitutional. And the prospect for more government control is not appealing but there is a strong case to be made that this is perhaps the one redeemable provision (in concept) within the 3,000-page health care law.

The obvious advantage is that by creating a health care system where everyone has insurance you dramatically expand the risk pool, which is a proven way to drive down costs especially when more younger and healthier individuals are covered.

On this latter note, high deductible plans should certainly be an option to fulfill a coverage requirement.

Proponents of an individual mandate cite the auto insurance analogy to support their position that there is precedent for compelling individuals to take responsibility for financial risk but they get caught flat-footed with the counterpoint that driving a car is voluntary activity and therefore it is appropriate for government to establish conditions unlike health insurance where there is no such activity.

But let’s take a closer look at this comparison.

If someone gets in an automobile accident and does not have insurance, their car will not be towed into an automotive emergency room and fixed without consideration to ability to pay. Rather, The car will remain damaged, or totaled until such time the owner can pay to repair or replace it. The financial liability is not shifted to anyone else.

Now if the driver gets admitted to the hospital as a result of this accident they will get “repaired” regardless of their ability to pay. And if they aren’t able to pay the cost will be shifted to other health care payers, including self-insured employers.

This fact should give even libertarians pause in opposing an individual mandate because a person’s decision not to maintain insurance has an adverse impact on the larger population and compromises the principal of self-reliance. After all, when is the last time you heard of someone refusing essential treatment because they knew they could not pay?

Requiring health insurance coverage would also benefit the self-insurance industry because more individuals would chose to enroll in their employers’ group plans, thereby expanding the risk pools for employers while increasing revenue potential for service providers.

To be sure, the way the individual mandate provision as incorporated in the PPACA is flawed, largely because the specific penalties and incentives will not likely achieve the desired results. But that is not to say that this approach should be rejected outright. Properly structured, an individual mandate could help put our health care system on the right track.

It’s unfortunate that President Obama and the Democratic Congress wrapped so much bad stuff around this targeted health care reform approach that we will likely never know how it may have worked.

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Show Me The Money -- Politics and the Self-Insurance/ART Industry

The self-insurance/alternative industry is a major force in the U.S. economy, but it is largely invisible to most members of Congress. It is similarly cloaked at the state level.

So why the disconnect? Follow the money trail, or should I say the absence of such a trail.

While it’s rare these days that political contributions can explicitly “buy votes,” the reality is that financial support normally does get you access to politicians, which allows interest groups to deliver their messages in an unfiltered way.

Almost every major industry gets this concept. Sadly, our industry is one of the few notable exceptions.

This conclusion is easily quantified by looking at the political contributions made by the business community generally and the traditional insurance industry more specifically. They dwarf what has been contributed by those with an interest in protecting and promoting self-insurance.

As my role within our industry has evolved over the past few years, I have become what political operatives call a “money man,” which means I am responsible for passing the hat to collect contributions for politicians that we hope will support various legislative/regulatory priorities.

Obviously this role has provided me a unique perspective on our industry’s historic stinginess and naivety about how the political process really works.

Now of course there are exceptions. Many companies and individuals reach for their checkbooks immediately upon request and do this enthusiastically. But in my experience, soliciting political contributions is a tough sell in most cases.

Complicating matters is that political contributions at the federal level must be done through personal checks or credit cards. No corporate money is allowed.

Interestingly, there are countless individuals who have made a very nice living though their involvement in the self-insurance/ART industry, but hesitate when asked to financially support political initiatives that will help the industry. It’s difficult to square this reality.

Other individuals have the mindset that they are willing to write a check, but only when there’s a hot issue. That’s short sighted.

For those of us who clearly understand the concept of insurance, you know you can’t purchase property insurance when your house is burning down or health insurance when in an ambulance on the way to the hospital.

Making targeted political contributions is the equivalent of purchasing insurance to mitigate possible future legislative/regulatory risks.

One complication is that our industry is comprised of corporate buyers (employers) and service providers. These two segments have different motivations and capabilities for political involvement.

Service providers generally have a top-line interest in legislative/developments. In other words, they consider how such developments will affect revenue generation. In my experience this is the most powerful motivation to write a check.

Risk/benefit manager types, on the other hand, are focused on the expense line. They just want to be able to utilize self-insurance vehicles to control costs with minimal regulatory hassles. And while most view this as important, it’s uncommon that they will write a personal check in support of a corporate objective for which they do stand to directly benefit financially.

That’s not a criticism, it’s simply reality. And because of this reality, a large number of people in our industry will be confined to the sidelines of political involvement making it even more important that service providers pick up the slack.

Despite our industry’s historical underperformance in the money game, I am actually cautiously optimistic for the future. My sense is that the messaging just needs to be sharpened so that political contributions are viewed as both insurance and investments.

I will be directly involved in some targeted political fund-raising efforts over the next couple months and expect to have many one-on-one conversations as part of passing the hat. This will give me a new opportunity to test my assumptions.

Will people show me the money? I’ll circle back on this topic in the near future and let you know.

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ADA 2.0 Packs a Sharper Edge for Workers' Comp. Self-Insurers

The landmark Americans with Disabilities Act (ADA) of 1990 substantively changed workplace rules in ways that required employers to adapt a variety of hiring and return-to-work practices in order to maintain compliance.

Now 20 years later, the ADA has been amended and the implications for workers’ compensation self-insurers are significant. At issue is that ADA 2.0 will impose several new restrictions on how return-to-work programs can be structured.

The new final regulations are expected to be released this spring, but in anticipation of this expanded regulatory reach some self-insured employers have already felt the sting.

Over the past the year, the Equal Employment Opportunity Commission (EEOC) has been quietly adding nearly 300 investigators to enforce ADA requirements. Most recently, they have been targeting larger companies (generally self-insured) to determine if their return-to-work programs are ADA 2.0 compliant.

This is a fundamental change in EEOC’s historical approach of investigating claims made by specific employees. In other words, the EEOC is now essentially conducting on-site “audits” to determine possible ADA 2.0 violations.

Companies are already starting to pay big fines as part of negotiated settlements as the EEOC flexes its muscles in advance of the release of final regulations – proactive enforcement, indeed.

For example, late last year Sears settled an EEOC complaint for $6 million in connection with its employee absence policy that was deemed to improperty accommodate disabled workers. United Airlines recently paid more than $600,000 for a policy that refused the allow returning workers with disabilities to work reduced hour shifts.

With the EEOC investigative staffing ramp up, it’s clear that audit and enforcement efforts will pick up significantly this year and likely entangle many workers’ compensation self-insurers with carefully structured return-to-work programs.

The good news is that there are ways that employers can make sure they are ADA 2.0 compliant and we’ll report on that in the coming months.

In the meantime, the march of big government continues.

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How to Reamortize Your Mortgage

by Richard F. O’Boyle, LUTCF, MBA

Many people refinance their mortgage in the hopes of lowering their monthly payments, but there’s a little-known trick that can lower your monthly mortgage bill without a costly and hassle-prone re-fi. The last thing the banks want you to do is shorten your loan, reduce your interest rate, or lower the lifetime interest paid: that’s why they push refinancing. They want to sell you a new mortgage with all the attendant fees and lock you in for another lengthy term.

A reamortization, also known as a recast or a principal curtailment modification, will lower your monthly payment without a new mortgage loan. The bank will recalculate your current mortgage (using the same term and interest rate) and lower the required principal and interest payments going forward. Over the life of the loan, the total interest payments will also be lower. This strategy only works if you have been paying additional principal towards your mortgage over the years or you have a lump sum now that you want to pay.

Many loan officers don’t even know what a reamortization is! And banks don’t make it easy for you. They will charge a fee of about $200 and then drag things out for a few months. They may even require you to have your mortgage prepaid for a month in advance while they shuffle their paperwork. But if your monthly payment goes significantly lower, it may be worth the effort. After recasting your mortgage, you can still continue to make additional principal payments and then do the process again in a few years.

If you decide that recasting makes sense for you, be prepared:
- Have a lump sum (perhaps from a bonus from work or an income tax refund);
- Call your mortgage company and track down their recasting specialist and get a direct dial phone number and mailing address;
- Ask them to calculate your new recasted payment amount and to quote you the fee;
- Draft a letter of request for the recast (or whatever their bank calls it) and submit it along with the fee;
- Don’t send your lump sum payment until they tell you exactly when and where to send it;
- The bank will send you a letter that needs to be notarized and returned before your next payment is due; and finally,
- Keep copies of everything!


© 2011 Prism Innovations, Inc. All rights reserved.

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