Diversions December 4, 2014

More Wealth in Renting Homes

Buying a home may not always be the great investment most people think it is.
Reported by

Median-income households could generate more than 50% additional net wealth over the next 10 years by renting and investing instead of buying a home, according to “House of Cards,” a study from HelloWallet. The catch is that people have to invest to reap that extra money.

The report brings a new perspective to families’ unique decisions to buy or rent a home by analyzing the historical tax benefits and wealth-building opportunity costs of home ownership. The paper includes two analyses. The first examines historical home-purchase data from the Federal Reserve Board’s 2013 Survey of Consumer Finances and compares how much wealth Americans would have created had they rented a comparable home and invested any savings in a portfolio of stocks and bonds over the time they owned the home.

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The second looks at two hypothetical households, one earning $50,000 a year and the other $100,000, living in 20 major cities to examine the effect of state and local tax structures on the buy-versus-rent decision.

The analysis finds there are two things prospective home buyers can do as they weigh all the factors. First, calculate their “rent-to-price” ratio, or the ratio of the annual rental costs of a home compared with its purchase price, to determine whether to buy a home or rent and invest. If the rent-to-price ratio is 5% or less, people may be better off renting and investing any savings. If the rent-to-price ratio is greater than that, they may be better off buying.

Second, beware of online calculators. Many free online “buy-or-rent” calculators inflate the benefits of home buying. The study shows that calculators provide inaccurate guidance to more than 90% of renters who are considering whether to buy a home by overestimating tax benefits and underestimating the returns an individual can earn by investing. One reason: Most renters take the standard deduction on their tax returns instead of itemizing, but the calculators always assume that users will itemize.

Another flaw in the calculators is that most inaccurately assume there are no alternative investments to home buying other than putting the money in a savings account earning low (and risk-free) returns when renters could invest in a wide-variety of other vehicles, including a tax-advantaged individual retirement account (IRA), 529 college savings plan, or a defined contribution plan such as a 401(k).

Among other findings:

  • Median income homeowners realize no federal tax benefit in three out of four major cities;
  • More than half of current homeowners (more than 40 million households) bought homes during periods when average homebuyers would have been better off renting and investing; and
  • Americans should have access to advice that encourages them to consider investing in assets other than housing.
Data & Research December 3, 2014

Retirement Plan Sponsors Place High Value on Match, Advisers

Providing a matching contribution and access to an adviser were ranked by plan sponsors as the most important actions to encourage employees to save.
Reported by

Ninety-four percent of retirement plan sponsors polled by American Century Investments said providing a matching contribution in their plans is at least somewhat important to encourage employees to save, with 51% saying it is extremely important.

Providing access to a financial adviser was ranked as at least somewhat important by 95% of respondents, with 31% saying it is extremely important.

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Nearly all respondents said supporting employees’ efforts to have a secure retirement is an important corporate goal for providing retirement plans, yet only 28% measure how ready employees are for retirement. All respondents said the percent of employees taking full advantage of the match contribution is an important indicator of the success of their retirement plans, and 81% measure this metric.

Seven out of 10 plan sponsors view participant communication and education programs as extremely or very important, but only two in five think programs are effective, and 58% of plan sponsors agree that participants will not take advantage of support that is offered to them. Sixty-eight percent said materials prepared by plan providers play a major role in educating participants, while 65% said enrollment meetings play a major role and 58% cited plan providers’ websites.

Forty-three percent of plan sponsors polled said they offer retirement planning seminars or webinars to defined contribution plan participants fairly often, while 45% said they offer them seldom and 8% said they never do.

 

Adviser Use

The survey found retirement plan advisers are mainly sought for investment selection and monitoring responsibilities.

Three in four employers use an adviser, and three in ten of those who do not are likely to use one in the future. Nearly all are satisfied with their current adviser, and more than half have been with their adviser for at least five years.

Eighty-eight percent of plan sponsors that use an adviser said they use one for investment selection, and 83% use an adviser for employee education. Eighty percent use an adviser to help meet fiduciary obligations. Other adviser responsibilities include helping with compliance issues (78%), communicating with employees (76%) and plan administration (70%). Fifty-two percent said investment selection and monitoring is the most important duty their advisers perform.

For those respondents that expressed they are likely to use an adviser in the future, 58% indicated it would likely be for investment selection, 54% for communicating to employees and 53% for educating employees.

The survey was conducted in the first quarter of 2014 among 310 plan sponsors representing plan assets of less than $25 million through $100 million. More than 1,600 retirement plan participants were also surveyed, and the results showed most participants want a “nudge” to help them save for retirement (see “Employees Open to Retirement Savings Intervention”).

An Executive Summary of the survey findings can be viewed here.

 

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