Our recent post on similarities of the MyRA and non-guaranteed preneed concluded with references to how criticisms of President Obama’s new retirement account were applicable to preneed. One such criticism relates to the lack of investment performance, but we will save that issue for a future date. For this post we want to address the costs associated with implementing and maintaining the MyRA.
Bloomberg News noted in an article that fewer employers maintain a pension plan or 401(k) plan due to their costs. The report included a quote indicating that research has shown middle and moderate income workers are likely to save for retirement when they can do so with a payroll deduction, and are unlikely to do so when they don’t have that option. The report goes on to note that even though the MyRA would help avoid most administrative costs associated with formal retirement plans, small business groups have opposed basic savings plans because of costs associated with payroll deduction requirements. If forced to provide payroll deductions for a voluntary retirement program, employers are fearful the accompanying costs will be wasted when employees do not follow through.
Trust funded preneed programs have many of the same administrative costs of a 401(k) plan. Plan administrators must track individual purchaser accounts and make periodic allocations of income, expense and value. With the guaranteed contract, preneed sellers have assumed the risks and rewards of investment performance. Under many states’ preneed laws, the seller also controls income earned by the trust. Consequently, the seller has been expected to bear excess costs associated with the trust funded preneed program. While each preneed trust is a common trust fund for purposes of 12 CFR Part 9, Federal policies have been ‘modified’ to reflect the economic realities of the guaranteed contract. In states where trust income can be distributed prior to performance, the IRS and the OCC have been flexible regarding income, expense and value allocations. In states where income is required to be accrued, trustees can also take comfort in the seller approving allocation procedures.
But when the price guarantee is eliminated from the preneed contract, the purchaser becomes the primary beneficiary of the arrangement, and assumes the risk and reward of investment performance. There are fewer (if any) penalties to canceling the arrangement or transferring the funds to different funeral homes. The purchaser can defer payments when emergencies arise, or make payments whenever convenient. The arrangement has the portability features that consumers and regulators seek. And, it comes with the tax benefits of the Qualified Funeral Trust (no messy 1099’s or Grantor statements). The non-guaranteed preneed contract could be called the purchaser’s “MyPreneedAccount”.
But, the funeral home offering MyPA to consumers cannot collect a purchaser’s payments and hand them over to the Federal government for investment and administration. Instead, preneed administrations arguably have greater administration duties than with the guaranteed contract. Instead of a single seller, the trust now has multiple income beneficiaries. The premise for Federal agencies granting administrative flexibility has changed. And there is the new ‘voluntary’ nature of the MyPA. Like the MyRA account holder, the non-guaranteed contract purchaser has less incentive to make payments on the preneed contract. How should the account’s expenses be paid if purchaser has found payments inconvenient after only paying $25?
We are of the mind that non-guaranteed preneed will be beneficial to consumers that need flexibility in preparing for final expenses, and who want to retain greater controls over the account. But, those benefits and rights come at a cost. Locally, state regulators have given early indications that they expect the seller to continue to foot the expense of the non-guaranteed contract. That position is difficult for this author to reconcile with the realities of the MyPreneedAccount.