Recently one of our advisor clients came to me with an interesting question: Could one of his accountholders roll funds from a Traditional IRA back into a 401(k) plan, even though contributions had been made to that IRA? As with most questions in the retirement plan world, the answer was, “It depends.”

Funds from a Traditional IRA can be rolled back into a 401(k) plan only if the plan document permits such a rollover. Assuming the plan does permit this type of reverse rollover, only pre-tax retirement plan contributions made to the IRA that were tax-deducted and earnings in the account can be rolled back into the new 401(k) plan.

Also, if there were after-tax contributions in the IRA, those earnings can move back into the 401(k) plan but an amount equal to the after-tax contributions must remain in the Traditional IRA.

For example, assume that “Amy” had directly rolled over $50,000 from a 401(k) plan into a Traditional IRA in 2005. In 2006, Amy made an additional IRA contribution of $4,000 that was deductible at the time because she did not have access to a retirement plan through her employer.  In 2007, Amy made another $4,000 contribution to the IRA, but this time she could not deduct that contribution.  In 2010, Amy started working at a company whose 401(k) plan permitted Traditional IRAs to be rolled into the plan.  At that time, the value of the account had grown to $70,000. Amy would need to leave $4,000 in the IRA after transferring $66,000 to the 401(k) plan because the $4,000 was the amount of the non-deductible contribution made to the Traditional IRA.

As an additional strategy, assuming Amy has no other IRAs, she has the option of converting that $4,000 Traditional IRA into a Roth IRA for little, if any, tax consequence.

It is also important to note that it is the responsibility of the accountholder to keep track of the after-tax basis in an IRA account, not the financial institution holding the assets.

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Pittsburgh-based turnkey IRA solutions provider retools

Pittsburgh, PA – February 25, 2010 – Pittsburgh-based turnkey IRA solutions provider Inspira has expanded its client-base, enhanced its offerings and retooled its brand.

After focusing its efficient, full-service turnkey IRA solutions on Third Party Administrators and financial advisors for much of its history, Inspira will now be providing its expertise to affinity groups, banks, broker dealers, CPA firms and payroll companies.

“If they have an IRA product currently, we can likely enhance that product and reduce their costs,” said Lowell Smith Jr., President and Founder of Inspira.

On top of creating a revenue stream for clients with its automatic rollover product, Inspira’s complete turnkey IRA solution gives any company, group or organization all of the benefits of having their own in-house IRA solution without the labor- and cost-intensive requirements associated with such an operation.

Inspira has gone to great lengths to identify the pressure points for each of its five new client bases and formulated specific solutions that alleviate those anxieties.

Clients get to choose from any of four unique branding options, all of which include marketing materials, 7-day-a-week call center assistance and helpful account opening and support tools. End users also get 24/7 access to their company’s personalized Web site or through Inspira’s house brand, TotalIRA.com.

The branding options include a base option that contains fundamental content and is maintained by Inspira (TotalIRA.com); a private label option that gives the client limited control over their site’s look-and-feel, funding line-up and fee schedule; a private label plus option that offers more private-label branding opportunities and also includes control over content; and a fully customized option with a Web page that can be developed entirely by Inspira or in conjunction with a client.  This fully customized option can also be equipped with the company’s own personalized domain name, logo and color scheme, and clients have autonomy over fund line-ups and fee schedules.

“We’ve left no stone unturned,” said Smith Jr. “I really believe that we’ve got the perfect solution for any business or organization that either already has an IRA solution or would like to offer another retirement option to its clients.”

Inspira has also improved its small business offerings in preparation for the government-mandated payroll deduction IRA program that is currently working its way through the legislative process. The mandate would force businesses with 10 or more employees that are not currently offering retirement benefits to start doing so through a payroll deduction IRA program. With its reputation as a cost-eliminating alternative to running an in-house IRA program, Inspira is an attractive option for small and medium businesses.

“Another key element in our arsenal is a superior small business offering, which is valuable to CPA firms as well as payroll companies, because they have a number of small employer clients that do not want to take on the expense of adopting a full blown retirement plan,” added Smith Jr. “We provide them with a logistically sound way of offering them those benefits thereby enhancing value to their customers.”

The newly launched Web site, InspiraFS.com, has specific pages geared toward each of the five new targets which highlight the benefits of utilizing Inspira’s services to their organization. The resource library features a comprehensive IRA dictionary that makes financial vocabulary accessible to people outside of the realm, and also provides a catalogue of helpful links to articles with IRA advice, important IRA news and Smith’s blog entries.

Upon entering the site, a short video gives visitors a look at the recent explosion and subsequent potential of the IRA market, while a second, slightly longer video delves further into how Inspira’s solutions function. Potential clients get a glimpse of how their Web page would appear, go through a step-by-step demonstration of Inspira’s fast and easy account sign-up process and see first-hand the security measures involved with the eSignature program.

“I love the new site,” said Smith Jr. “Particularly, I like that it provides more information on what we do and even has a demonstration of the process, what our Web presence looks like and how our electronic signature works.”

Inspira was founded in 2002 by Smith Jr., who has 27 years of experience in the retirement and financial services industry, including nine years with the United States Department of Labor. Smith Jr. was also a primary architect in the development and implementation of retirement start-up Invesmart, Inc. (Now The Standard).  Inspira is a subsidiary of Pittsburgh-based venture capital firm ABG Capital.

Contact:

Luis Gibb

Director of Marketing

Inspira

8 Penn Center West

Suite 101

Pittsburgh, PA 15276

marketing@InspiraFS.com

P: 412-440-2006

Payroll IRA programs are and have been a part of the voluntary retirement benefits offered by employers for decades.  Employer IRA plan options come in the form of a Simplified Employee Pension Plans (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE), replacing the SAR-SEP as the salary reduction IRA program for employers.  In addition, the Department of Labor and the IRS encourage employers, even those that have retirement plans to offer payroll deduction IRA programs.  In 1999, the DOL issued Interpretive Bulletin 99-1 that encouraged employers to use payroll deduction IRA programs and clarified that they would have no fiduciary responsibility for those programs.  In addition, the IRS has no annual filing requirements for a payroll deduction IRA except those required to establish accounts.  The primary difference between the existing IRA programs that can be offered by employers today and the proposal of the Obama Administration is that the proposed program will become mandatory in many cases.

While the exact enabling legislation is still being drafted, the early guidance provided in the “General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals,” often referred to as the Green Book, issued by the U.S. Department of Treasury in May 2009 identified the following key points to the proposal:

• Any employer without a retirement program (qualified plan or SIMPLE) that has been in business for at least two years and has 10 or more employees must offer a payroll deduction IRA program to its employees.  Even if the employer has a plan but places exclusions on a portion of the workforce, except those employees who are in a collective bargaining unit, are under age 18, have not completed the plan’s eligibility waiting period or are non-resident aliens, the groups that are excluded must be offered a payroll deduction IRA.
• All employees not opting out of the payroll deduction IRA plan would be automatically enrolled at a 3 percent contribution.  (This percentage can be adjusted by the employer up to the IRA contribution limits.)
• The automatic enrollees would be invested in a default fund of a type identified by the enabling legislation.  There would be no employer compliance requirements as under a qualified retirement plan.
• Employers adopting the program can claim a temporary tax credit of $25 per employee up to $250 each year for two years following implementation.  This credit could also be used by smaller employers that opt to offer a payroll deduction IRA program.
• Contributions would qualify for the SAVER’s tax credit.

 If enacted, this program would be mandatory no later than January 1, 2012.

Early indications are that this proposal has an excellent chance of being enacted because of the bi-partisan support it is getting in Congress.  Because of this fact, providers should pay close attention to future retirement legislation that will include this payroll deduction IRA program. The proposal offers a whole new market to payroll companies and 401(k) record keepers, as well as mutual fund companies, advisory firms, insurance companies, and brokerage firms.   Those that act first and decisively will have a significant advantage in capturing this enormous opportunity.

Of all the proposals regarding retirement plans being floated since the beginning of the Obama administration, the one with the most “legs” seems to be the Automatic IRA.  A concept piece that is included in the budget proposed by the administration, the Federal government would require employers that do not offer a retirement plan to its employees to offer a payroll deduction individual retirement account (Automatic IRA).  Currently, there are IRA plans for small businesses such as the Simplified Employee Pension (SEP) Plan or a Savings Incentive Match Plan for Employees (SIMPLE IRA).  However, these IRAs require employees to fund all or a portion of the account, and the SEP contributions specifically are voluntary by the employer.   

The thought is that the Automatic IRA program will cost employers very little to establish, and the accounts will be self-funded by the employees participating in the program.  The result would be an increase in retirement savings among the estimated 75 million American workers currently without access to an employer sponsored plan.  While all American workers under 70½ can make contributions to an IRA account now, the payroll deduction and potentially the use of automatic enrollment (unless the employee elects out of the plan a default percentage of salary will be put into the plan) will increase retirement savings as it has with 401(k) plans.  In addition, it is assumed that the amount that can be contributed to these Automatic IRAs will be greater than the $5,000 ($6,000 if you are age 50 or over) that can now be contributed to a Roth or Traditional IRA. 

While I believe this type of program would be extremely beneficial, there are concerns over some of the buzz about potential features.  One thought is that very small employers will be exempt.  This makes sense if you are self employed or employ only you and your spouse.  But for this to truly be beneficial all employers with employees should be required to participate. 

Secondly, there is some thought that the plan will be run by the Federal government and contributions will be made into “safe” investments specified by the government.  This would be a grave mistake.  The government is not equipped to record keep this type of program, and I personally would have concerns about whether or not contributions would even be “funded” or would this just be another tax such as Social Security.  The program should be regulated but administered by the private sector through payroll companies and other financial institutions that are already involved to some degree in retirement plans and IRAs. 

The biggest potential winners with this proposal, aside from the IRA accountholders, are the payroll companies.  However, most of them do not have IRA products.  If I were these companies, I would either create or look to partner with firms to offer this type of solution. 

It will be interesting to follow this legislation to see where it leads us.

By:  Lowell M. Smith, Jr.

          President, Inspira

“Congressman Miller’s (D-CA and Chairman of the House Education and Labor Committee) mission to improve the defined contribution system is laudable,” states Lowell Smith, President of Inspira. 

“The concept of combining 401(k), 403(b) and 457 plans into one plan-type will eliminate confusion and cost, while potentially adding fiduciary protections to plans of non-profits and government entities that have no protection under the Employee Retirement Income Security Act’s (ERISA) fiduciary provisions.  However, some of the other suggestions made at the hearing such as mandating default investments into annuities, restructuring IRAs or having an option where the Federal government manages retirement assets present unique problems,” cautions Smith.

Annuities are generally structured as insurance products, meaning the underlying assets are general assets of the insurance company issuing the annuity.  Should an insurance company go bankrupt; the annuity accountholders become creditors in the bankruptcy proceedings.  The point is while annuities are viable investment vehicles; they come with their own unique risks.

Since IRAs are primarily a supplemental retirement savings vehicle or a rollover vehicle offering more choice and estate planning options to individuals, merging them into one plan structure can create more confusion and may affect the flexibility and investment choices unique to an IRA.  Further complicating the issue is that there are significantly more assets and accounts in IRAs than in 401(k) plans.

Finally, having the Federal government manage assets of individuals is something the government has never done, meaning there is little evidence to support the assertion that the government is equipped to undertake this task.  Issues to consider include:

·         How will the fund be run?

·         How will recordkeeping be accomplished?

·         How will contributions be received?

·         What would be the investment vehicles?

·         Who would regulate the fund/plan?

“It is critical that we have a viable retirement system, but Congress should tread carefully when addressing these issues and link any changes to its long-term solution for Social Security and Medicare,” concludes Smith.

About Inspira

Headquartered in Pittsburgh, PA, Inspira was created by retirement industry experts who identified a need for an independent IRA management service. As a result, Inspira provides the IRA servicing and technology solutions that enable institutional clients to eliminate costly back-office operations while enhancing their product offerings and profits. Inspira becomes your back-office, freeing your organization to concentrate on efforts with higher-margin asset-based fees tied to selling the IRA.

No matter what type of IRA – Roth, Traditional, SEP, or SIMPLE – Inspira is the ideal third-party administrator for a financial services company’s IRA business.

Sincerely,

Lowell Smith

Inspira is a portfolio company of ABG Capital.