401(k) Savings Rates Have Increased

In addition, the number of health savings account holders on Fidelity’s platform increased 35% over the last year.

While the number of health savings account (HSA) holders on Fidelity’s platform increased 35% over the last year, a Fidelity analysis indicates that workers who contribute to their HSA are not doing so at the expense of their 401(k) contributions.

Individuals who contribute to both their HSA and their 401(k) contributed an average of 9.9% at the end of Q3, compared to a contribution rate of 8.5% for individuals who only contribute to their 401(k).

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And that 8.5% average 401(k) contribution in the third quarter is the highest percentage in almost 10 years, according to Fidelity. More than one-in-four participants (29%) increased their contribution rates over the last year. Significant growth was seen among Gen X investors. Their average 401(k) balance increased 18% to $98,800 from last year.

Those higher contributions along with strong stock market performance increased the average 401(k) balance 10% over the last year. The average 401(k) balance rose to $99,900 from $90,800 in Q3 2016—a record level, according to Fidelity.

The Fidelity analysis also found an increasing percentage of workers are investing their 401(k) savings in target-date funds (TDFs), which can help individuals maintain the right allocation of stocks, bonds and cash. Nearly half of all workers (48%) hold all of their 401(k) savings in a TDF, up from 30% in 2012.

“Two of the most important aspects of a retirement savings strategy are how much an individual contributes and how they allocate their savings,” says Jeanne Thompson, senior vice president at Fidelity. “The increasing use of target-date funds, along with the increasing number of individuals contributing more to their retirement accounts, will help ensure people are saving at the right level and have a diversified mix of assets, which will put them on the right track to reach their retirement savings goals.”

GOP Tax Reform Package Includes Some Important Retirement Adjustments

Industry observers are pleased to see the overall deferral limits for 401(k) plans left unaffected, but there are still some important changes included in the bill concerning the treatment of DC account loans, hardship withdrawals, nondiscrimination testing, and more. 

Early interpretation of the tax reform proposal issued by the U.S. House of Representatives today from Empower Retirement points to some important changes that will impact defined contribution and defined benefit retirement plans.

For example, currently an individual may “recharacterize” during a given tax year a traditional individual retirement account (IRA) contribution as a Roth IRA contribution (and vice versa), and this person may also recharacterize (reverse) a conversion of a traditional IRA to a Roth IRA. Under the new tax proposal, such tax-year recharacterization of IRA contributions and conversions generally would no longer be permitted, beginning after 2017.

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Turning to another change, Empower explains that currently, in‐service distributions for governmental defined benefit (DB) and defined contribution (DC) plans are limited to participants age 62 and older—or age 70.5 and older for 457 plans. The new proposal would allow all participants in governmental DB and DC plans to take in‐service distributions at age 59.5, including 457 plans.

Empower further explains, under the proposal, the 6‐month suspension on 401(k) deferrals following a hardship distribution rule is deleted and a participant can continue making contributions without interruption. Tied to this, employers will be permitted to choose whether hardships can include earnings and employer contributions.

Whereas today some plans interpret hardship distribution rules to require a participant to take a loan before they qualify for a hardship distribution, under the new legislation the Internal Revenue Code Section 401(k) will explicitly state that a distribution will not fail to be a hardship distribution solely because the participant did not take any loan.

As Empower notes, today plan sponsors may require an employee to repay completely a loan upon termination of employment or plan termination. If the employee is unable to repay the loan, then the employer will treat it as a distribution. The employee can avoid the immediate income tax consequences if he or she is able to come up with the loan’s outstanding balance within 60 days and rolls over this amount to an IRA or eligible retirement plan. Under the new legislation, this 60 day period would be extended to the employee’s due date for filing their tax return (including extensions) for that year.

Finally, Empower points to one more change it views as important for the retirement planning industry: “For employers sponsoring both a DB and DC plan, the nondiscrimination rules allow limited cross‐testing between the two plans. The result can be that a closed DB plan ends up violating the nondiscrimination rules even though workers are continuing to accrue valuable benefits.” Reforms called for by the GOP bill would allow expanded cross-testing between a DB and DC plan for employers who sponsor both types of plans.

Alongside the Empower commentary, many other retirement industry providers and lobbying organizations have registered their early take on the text of the tax reform proposal. The Insured Retirement Institute (IRI) released a statement from IRI President and CEO Cathy Weatherford, voicing support for Speaker Paul Ryan (Republican, Wisconsin), House Ways and Means Chairman Kevin Brady (Republican-Texas) and “all the members of the House Republican Conference recognized the crucial role tax-deferral plays for Americans saving for their retirement.”

Weatherford sees the legislation “maintaining the tax-deferred treatment of retirement savings and preserving Americans’ right to choose how their retirement savings will be taxed.”

“Additionally, we were pleased to see the legislation will lower the overall corporate tax rates,” Weatherford says. “The bill also proposes several changes to sections of the tax code which impact the taxation of life insurance companies and IRI is currently analyzing these changes. We remain committed to working with members of the House and Senate to ensure that any tax reform measure signed into law is beneficial to American retirement savers.”

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