Data & Research June 22, 2017

Plan Sponsors Respond to Possible Pre-Tax Contribution Cutback

While most employers would disagree if Congress were to reduce pre-tax savings limits, 85% surveyed would continue offering a plan.  
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A new survey from the Plan Sponsor Council of America (PSCA) highlights the large percentage of plan sponsors not in favor of potential modifications regarding tax treatment of retirement savings plans.

The report provides insight from 443 plan sponsors, surveyed in May 2017, to help retirement plan professionals understand how reducing or even eradicating pre-tax contributions in qualified retirement plans under 401(k) and 403(b) tax plans would impact employers and employees. According to the survey, more than 90% of respondents suggest eliminating or reducing pre-tax contributions to retirement savings plans would do far more harm than good.

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“These proposals could impact the more than 100 million Americans who participate in tax-qualified retirement savings plans. As the voice of America’s retirement savers and plan sponsors, PSCA is working with other benefits organizations to educate Washington’s policymakers on the potential impacts that changes to the tax code could have,” says Jack Towarnicky, executive director of PSCA. “These survey results will help inform policymakers on how certain changes may affect access to and participation in retirement plans.”

Additionally, the report finds almost 90% of employers feel eliminating or reducing pre-tax deferrals will dramatically reduce employee savings. On the other hand, over 90% believe future pre-tax savings limits on 401(k) and 403(b) plans should be indexed to inflation. More than half marked “strongly agree” when asked if they rely on 401(k) and 403(b) plans to attract and retain talented employees.

While most plan sponsors are pushing back in response to the possible reduction of tax-deferred savings, survey results show 85% of employers would continue to offer a plan should Congress reduce pre-tax savings limits. However, if Congress were to change the laws specifically to require contributions be made to Roth accounts, with taxes paid up front, rather than traditional 401(k) plans, that number falls to only 70% of employers sticking with it. 

Three-fourths of respondents currently provide a Roth feature to employees, with 30% of plan sponsors reporting 10% to 20% of eligible employees making Roth contributions, and a quarter indicating only 5% to 10% of eligible employees are making these contributions. Of those refusing to hold Roth, 60% say they had weighed offering it and ultimately chose not to, and another 60% indicate their decision was due to cost concerns and administrative complexity in hosting Roth. 

Data & Research June 22, 2017

Older Americans in Urgent Need of Retirement Income Education

Most older Americans know very little about annuities, but the majority believe a source of guaranteed lifetime income in retirement is important, according to a study by the American College.
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Unlike their younger counterparts, individuals nearing or in retirement don’t have the luxury of long time horizons in which to grow their nest eggs. They are at a point where developing a strategy to sustain their assets and draw retirement income is critical. However, many lack the knowledge to do so effectively.

According to a survey by the American College of Financial Services, 74% of respondents failed a 12-question retirement income quiz. Of those who passed, only 5% scored a “B” (80%) or higher.

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In particular, several respondents failed to correctly answer questions around preserving assets and sustaining income in retirement. The survey found only 38% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, and only 34% know that a substantial negative investment return at retirement age is more damaging to portfolio sustainability than the same negative return a number of years before or after retirement. 

The study also indicates most respondents lack knowledge of best practices to execute near retirement. Only 33% understand the benefits of working two years longer or deferring Social Security for two years as opposed to increasing contributions by 3% for five years just prior to retirement. Moreover, fewer than half know that using a portion of their portfolios to purchase a life annuity can protect against longevity risk.

In fact, the lack of knowledge behind annuities was of particular concern to researchers. Rating scores on sections from best to worst, “annuity products in retirement” took the top followed by “company retirement plans” and “paying for long-term care expenses.”

According to the survey, only 29% know that buying an annuity product will be less expensive for an older person than a younger one; only 17% know the lifetime income payout rate for a 65-year-old male is roughly in the 6% to 7% range; and only 14% know a deferred annuity with a guaranteed lifetime withdrawal benefit can pay income even if the investment drops to zero.

However, 74% say having a source of guaranteed lifetime income in retirement is important.

Furthermore, the research highlighted several areas for which older Americans scored very well. Subjects marked by high proficiency include housing finances, Medicare issues, the principle of inflation, the role taxes play in retirement, and life insurance concepts.

Next: Demographics Play Key Roles in Literacy

The survey found major gaps in score levels along the lines of gender, asset amounts, and education levels.

More men (35%) passed the quiz than women (18%). More than half (82%) of women failed the quiz, suggesting the need for targeted communication and education based on particular concerns that may be more common among females.

Not surprisingly, higher passing levels seemed to correlate more closely with those who had substantial assets. For example, 49% of those with at least $1 million in assets passed the quiz, as opposed to 20% who passed with less than $1 million in assets. Of those who passed, 40% had at most a graduate degree, 32% had at most a college degree, and only 9% never graduated college.

Surprisingly, the study found that more people who weren’t working with financial advisers passed than those who were working with advisers. Thirty-four percent of people without advisers passed, and only 22% of those working with advisers did as well.

However, the study also shed light on what people value in advisers. Of respondents with an adviser, 52% stated it was extremely important for their adviser to act as a fiduciary. Moreover, 76% of respondents with advisers found it extremely important that their adviser educate them on retirement risks.

Moving forward, it’s imperative that advisers educate clients about these risks, focus on areas of low proficiency, and re-enhance dimensions of high proficiency. A thorough evaluation of a client’s financial literacy can also help, as 61% of respondents reported they were very or extremely knowledgeable about retirement income planning; however, only 33% of them passed the literacy quiz—with a mean score of 51.87%.

The 2017 RICP Retirement Income Literacy Survey Report can be found at Retirement.TheAmericanCollege.edu. 

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