WASHINGTON – While Washington watchdogs continue to debate whether the $1.35 trillion tax cut will ultimately help or hurt the economy and whether the cuts are too beneficial for higher-income Americans, credit unions can start gearing up for the silver lining of the bill – retirement plan enhancements. Tax rebate checks coming to mailboxes later this year are getting all the publicity, but changes to retirement plans may wind doing the most good in guiding Americans down a sound financial path. “This is big. This is probably the most sweeping legislation we’ve had since IRAs were created,” said Cindy Roggenkamp, vice president of marketing for Universal Pensions Inc., an IRA administrator serving about 1,000 credit unions. UPI was recently acquired by BISYS, Little Falls, N.J. Roggenkamp said credit unions are scrambling to figure out how the new law will affect their IRA programs, and how the changes can help them bring in more IRA accounts. “Think about the credit union documentation, the communication pieces, the lobby brochures. All the different member communications need to be reviewed and updated,” said Roggenkamp. The following are some IRA highlights of the law: * IRA contributions will increase from the current $2,000 level to $3,000 next year; to $4,000 in 2004; and up to $5,000 by 2008. Starting in 2008 the limits will be adjusted annually in $500 increments for inflation; * There is a “catch-up” IRA provision that allows those 50 and older to contribute an additional $500 in 2002 through 2005, and an additional $1,000 for 2006 and onward to help them catch-up if they are starting retirement savings late in life; * Better portability. The new law makes it easier to move money from other retirement/employer plans into an IRA. Amounts in 401a, 403b or governmental section 457b plans will be eligible for rollover into an IRA; * The limit on Education IRAs increases from $500 to $2,000, and now money can be contributed for elementary and high-school costs, not just college. Roggenkamp said the enhanced portability rules give CUs opportunities to add assets to their balance sheet via large chunks of IRA rollover dollars. “The rollover is a key part of what the industry is referring to as asset acquisition/asset retention. The new rules allow people more flexibility in moving money from different kinds of employer plans. Credit unions are in a very unique position because of their relationship with their members, and they enjoy close relationships with the companies they serve,” said Roggenkamp. So, for example, a credit union may want to talk to its SEGs about the IRA changes and have their HR departments discuss rollover options with employees who are changing jobs or heading for retirement – and of course the CU option can be explained to employees. Roggenkamp said the new law also provides some leeway to the old 60-day rule. The 60 day-rule basically says if an employee leaves the company they have 60 days to rollover the money in their employer’s plan into an IRA or qualified retirement plan. The new law gives the IRS the statutory authority to waive that rule in extenuating circumstances, such as the employee being injured; a mistake by the company or financial institution; a delay caused by the U.S. Postal Service and other like circumstances. CUNA Mutual Group, which commands 80% of the credit union IRA market administering 1.3 million IRAs, said it is working feverishly to get the word out to CUs about the potential IRA boon contained in the tax bill. “It’s an excellent opportunity for credit unions from the perspective that it lets their employees save more for retirement and from the perspective of marketing to their members,” said Tom Eckert Vice President of Pension Operations for CUNA Mutual Group. Typically, credit unions offer fixed IRA products, such as CDs. While this sometimes hurts CUs with consumers who are looking for higher returns in mutual funds and stocks, Eckert said with the volatility of the stock market right now, more members – especially older members closer to retirement – may be looking for the safety of fixed products. Rollovers from other plans to a CU IRA plan are an opportunity for credit unions to bring in a lot of assets very quickly, said Dennis Zuehlke, Compliance Manager, CUNA Mutual Group IRA Services. Zuehlke said the average value of rollovers administered by CUNA Mutual Group have been in the neighborhood of $17,000, whereas if a CU adds a new IRA account for a member, the account has been capped at $2,000 annually. Roggenkamp said IRS rules dictate that credit unions send out communications to their members who hold CU IRA accounts describing the contribution changes. The CU will also have to adjust their internal systems to reflect the changes, as systems may start to fail. “If a credit union starts taking $3,000 contributions a lot of systems are going to flag that as an error. The whole industry really needs to start preparing quite soon,” said Roggenkamp. Eckert said the new law will also breathe some life into dormant 457b plans at credit unions. 457b plans are income deferral plans for credit union executives. Once credit unions were able to start again offering 401k plans back in 1997, many 457b plans were abandoned for the 401k. The new law will push 401k and 457b limits to $11,000 next year and up to $15,000 by 2006. Vesting periods for employer matching contributions will vest under a three-year cliff vesting schedule or a six-year graded vesting schedule. The law also in essence de-links 457b and 401k plans. In other words, CU executives could potentially contribute $11,000 to a 401k and $11,000 to a 457b. This can become a key tool in compensating CU executives who can’t receive stock options like their bank counterparts, said Joe Tripalin, executive benefits director/assistant VP for CUNA Mutual. It’s not that simple however. There is what’s called a top-heavy test, which basically is a test that ensures the deferrals these plans are giving executives don’t outpace the rank and file by a large percentage. If they do, there are limits on what a CU exec can contribute to 401k and 457b plans. CUNA Mutual is planning Web casts and national toll free call-ins to help educate credit unions about the changes. “I think credit union HR departments are going to be key, educating the CEOs of credit unions and their board so they understand how this can help them plan for retirement,” said Tripalin. “There are two sides, the internal side on how the credit union can use its own benefits, and how to market these new options to members.” CUNA Chief Economist Bill Hampel said government is late to the game in increasing contribution amounts. “It’s been $2,000 since 1981. Inflation is just a tad over double of what it was in 1981, so it needs to be capped at $4,000 today to match the $2,000 back then. By the time it reaches $5,000 in 2006 it will be almost equal with inflation,” said Hampel. Hampel said one of the real benefits for lower and middle class income Americans comes in the form of a nonrefundable tax credit for IRA contributions. This provision gives consumers who earn below a certain income threshold up to a 50% credit of what they contribute to an IRA. “That’s almost like a matching 401(k),” said Hampel. The credit is available for joint returns of adjusted gross income of $50,000 or less; head of households earning $37,500 or less; and single filers earning $25,000 or less. Kelleen Trauger, NAFCU’s director of legislative affairs and who has watched the entire tax cut bill process, said even though she’s still in her 30s, the catch-up provision was one of the provisions she was most anxious to be included in the bill. “For me that really hit home. I’m glad it’s going to be around when I’m around that age (50). Sometimes when you’re younger you don’t think about what you’re going to do and how you’re going to do it, so this helps. The savings rate is dismally low, anything that helps people save more money is beneficial,” she said. The catch-up provisions also apply to the 401k. Starting in 2001, those 50 and older will be able to contribute an additional $1,000, eventually going up to $5,000 in 2006. While Hampel said CUs shouldn’t expect huge amounts of money flowing into CU IRAs, especially from younger members who prefer stocks and mutual fund IRA accounts, he did say there is the potential to get a lot of dollars from Baby Boomers looking to diversify. “They need to be mixing up their portfolio as they near retirement. Leaving a portion of their IRA in a fixed credit union certificate makes sense. Younger people with many years until retirement shouldn’t be in fixed-income certificates,” said Hampel. [email protected]

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