Compliance July 30, 2024

Budget Scoring Methods Could Lead to More Complicated Roth Policies

More tricky Roth provisions could be inserted into retirement plan legislation, as long as budget incentives continue to drive policy decisions.

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The congressional budget scoring process incentivizes policymakers to add Roth, or savings of after-tax earnings, provisions to retirement related legislation, experts say. While this may positively affect the federal budget in the short term, it can make retirement policies more complicated and difficult to administer.

The ten-year budget window that is used to “score” the effect a bill will have on federal revenues and expenditures considers traditional contributions to a defined contribution plan as a revenue loss, because of the upfront tax-deferral that is captured in the ten-year window. Roth contributions on the other hand, are considered a revenue raiser in the ten-year window, because Roth contributions are made by individuals on a post-tax basis, even though those contributions (along with any earnings on them) will result in a tax break upon withdrawal in retirement.

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Roth contributions are named for the late Senator William Roth, R-Delaware, who first proposed the idea of after-tax retirement plan contributions, and tax-free withdrawals, in 1989.

Kendra Isaacson, a principal at Mindset and a former staffer with the Senate Committee on Health, Education, Labor and Pensions, explains it this way: “the way Roth is scored is almost a budget gimmick.” She notes that a provision that is technically a tax break is counted as a revenue raiser and, as a result “we end up with things like the Roth catch-up contribution because it raises [federal funding] in the short-term.”

The Roth catch-up provision, found in the SECURE 2.0 Act of 2022, requires catch-up contributions made by participants earning $145,000 or more to do so on a Roth basis. It is perhaps the most infamously complicated provision in the law from an administrative perspective and by all accounts only exists to offset revenue losses found elsewhere in the bill.

According to a Joint Committee on Taxation report from March 2022, the Roth catch-up provision is actually the largest revenue raiser in the law, and would raise an estimated $22.36 billion from fiscal year 2022 through fiscal 2031. The second largest revenue provision is the optional treatment of matching contributions as Roth, which would raise an estimated $12.34 billion over the same time period.

Isaacson warns that Roth treatment can potentially be “a bigger loser [in federal revenues] in the long-term,” and cites young people saving in Roth accounts and withdrawing decades later when the majority of the balance, resulting from asset appreciation, is likely to have never been taxed at all. “We are not accounting for that,” she says.

Mark Iwry, a non-resident senior fellow at the Brookings Institution and former senior adviser to the Secretary of the Treasury, agrees that the budget scoring process creates perverse incentives to insert Roth provisions into legislation. He says that traditional retirement plan contributions “should be scored as a deferral and not a pure loss of revenue.” However, that is not how the scoring process works currently, he notes.

The ten-year window for budget scoring is used because it can become very difficult to estimate the effect a tax policy change will have on the budget farther off into the future, so a relatively shorter time frame is used, Iwry explains.

In the absence of a method that accounts for DC plan contributions in a more nuanced way, legislators will often be tempted with Rothification provisions to “pay for” retirement bills.

In 2025, many key provisions of the 2017 Tax Cuts and Jobs Act expire, meaning that tax provisions are likely to receive more attention from Congress going forward. Further changes to retirement law from a technical corrections bill on SECURE 2.0 or even a SECURE 3.0 would also attract further attention to retirement and tax law.

In all these debates, there will be pressure to find easy “revenue raisers” to “offset” other provisions, and this could include more Rothification.

Client Service July 30, 2024

Workplace Advice Use Trending Up, But Age, Assets Matter

Data from Hearts & Wallets found that more middle-asset, middle-aged households are turning to the workplace for financial guidance, but how widely that spreads is an open question.

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Art by Summer Lien
Workplace Advice Use Trending Up, But Age, Assets Matter

It is no secret that the workplace has become a focal point for financial firms offering everything from basic budgeting advice to complex investment products with pension-like retirement payouts. But even if you offer it, will a busy workforce pay attention?

According to Hearts & Wallets LLC, the independent savings, wealth and retirement data benchmarking firm with more than a decade of data, the answer is, increasingly, yes—but mostly for middle-class, middle-aged workers.

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In recent analysis run for PLANADVISER, the firm found a 15% increase in people turning to their workplace as a source of financial advice, with 65% of respondents doing so at least sometimes, usually or even as a primary source, up from 54% in 2015.

“People are leveraging workforce solutions at a greater rate,” says Laura Varas, founder and CEO of Hearts & Wallets. “Even if it’s not a primary source, they are taking a look at what’s available from the workplace, and from that, utilization [of financial wellness offerings] are going up.”

When diving deeper into the data, based on some 131 million households, Varas finds an intuitive, but also telling difference across asset levels: People in the middle asset ranges of $100,000 to $500,000 are much more likely to turn to the workplace than either those with fewer or more assets.

She found a similar story when looking at age ranges as well, with those aged from 35 through 44 most likely to turn to the workplace, with older workers turning to it at a lower rate and retirees showing up well below—though, interestingly, with a slight increase from their previous levels.

The breakdowns from Hearts & Wallets surveying are as follows:

Sometimes, usually or primarily turn to workplace for financial advice, by asset range:

Asset Range

2015

2023

<$100,000

37%

49%

$100,000 – <$500,000

47%

59%

$500,000 – <$2M

52%

52%

$2M+

35%

41%

 

Sometimes, usually or primarily turn to workplace for financial advice, by age range:

Age Range

2015

2023

<35

50%

65%

35 – <44

54%

74%

44 – <54

50%

63%

54 – <64

36%

48%

65+

18%

22%

To Varas, the data tell a story of increasing importance for the workplace, but also the potential to reach even more people.

“The workplace has a special role in helping the middle class and the people that are really struggling,” Varas says. “Peak accumulators are not the ones that need the help; they help themselves, and there are plenty of firms falling all over themselves to help them outside the workplace.”

Three Channels

Varas sees three core channels for people to get financial and investment guidance: financial wellness at the workplace; financial advisers; and managed solutions, such as managed accounts offered through defined contribution retirement plans.

Among those options, she sees financial wellness through the workplace as having the possibility to reach the most people.

“These financial wellness packages have the chance to be broader than managed products and be more scalable than traditional advisers,” she says. “That is what makes me excited about them.”

Varas’ excitement seems to be shared not just by the recordkeepers who offer financial wellness platforms, but by retirement plan advisories as well, with most of the largest players offering plan sponsor clients a workplace offering—think CAPTRUST at Work, Sageview Advisory Group’s PersonalSAGE and Hub’s FinPath.

But while she sees such services as being for the masses, she does not believe they should be free.

“Pricing is a necessary, good thing,” she says. “I’m not a fan of free stuff in the workplace—there needs to be pricing to provide high quality and have engaged users.”

Beyond the 401(k)

While the evolution of advice offerings and communication about those offerings needs to continue, Varas says the past 15 years have shown major improvements. About the time she started Hearts & Wallets after holding vice president roles at Fidelity Investments and Citigroup, advice “was very poor” for three reasons, she says.

First, it would focus solely on “saving more in your 401(k) or 403(b),” as opposed to considering the full financial picture. Second, offerings “tended to overstate the need and just scare people” into saving. Finally, she says, it was focused too much on near-term tax savings as opposed to long-term savings, putting people in the bad position of “dying with all of your assets” in a tax-deferred savings plan.

That approach led to people “just tuning out,” Varas says. “You have to make it about achievable goals. … I’ve been happy to see workplace advice over the last 15 years stop doing those bad things.”

If the workplace engagement numbers are going to keep increasing, it will take both private and public actors improving offering and access, Varas says.

“We’re seeing platforms that can [use payroll deduction] for emergency funds, to pay for college and other types of accounts,” she says. “It just doesn’t make sense anymore for the 401(k) to be the only thing people are investing in through work.”

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