Critiquing the Retirement ‘Crisis’

 It’s been said that a crisis is a terrible thing to waste. But what if it’s a figment of your imagination?

“Crisis” is a word much bandied about these days, most particularly as a label applied to retirement—by foes and fans alike. Indeed, while not so long ago headlines posed that premise as a question (“Is there a retirement crisis?”), it is now generally posited as a current reality (often accompanied by an exclamation point)—even though an examination of objective data (and a clinical application of the term “crisis”[i]) suggests otherwise.

To a certain extent, such hyperbole is understandable; “crisis” is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has had its fair share. Let's be honest - claiming that we are in the middle of a crisis is most assuredly a better bet in terms of getting a book deal, a televised interview, or hundreds of thousands of “clicks.”

And certainly over the course of my career, any number of leading retirement “industry” voices have referred to the “retirement crisis” as a motivation not only to get about the business of helping more working Americans prepare for retirement, including the encouragement of employers to not only offer access to retirement plan benefits, but to include design features, such as automatic enrollment and qualified default investment alternatives (QDIA), as well as to foster greater and more effective utilization of those benefits. 

More recently that same label has been used by critics of the 401(k) system (and private sector retirement plans generally) to further their claims that the system is “broken,” that it disproportionately benefits the wealthy, and that the incentives tied to the deferral of income have no real impact on the decision to save—claims all-too-unfortunately given credence every time someone in this industry uses the term “retirement crisis” as a current reality.

But is there really a retirement “crisis”? By any number of objective measures, the answer is “no,” or at least “not yet.” Doubtless there are some heading into precarious financial waters—though most were in those waters prior to retirement as well (trust me, if your financial circumstances ahead of retirement weren’t good, there’s nothing about retirement likely to cure that predicament). That said, actual data from real tax returns suggests that those in retirement are faring pretty well, certainly compared with pre-retirement. Moreover, those actually living in retirement seem more confident about their continued prospects than those viewing it from the pre-retirement perspective. 

Yet, we are surrounded by headlines that tout “averages” or even median savings levels that belie the reality that the age, tenure and costs of living vary widely, often dramatically among those responding to those surveys. We are bombarded by reports that dramatize notions of retirement confidence—or retirement “magic” numbers—generally taken among individuals who have never stopped long enough to do even a single approximation of what resources would be required tell us nothing (though they do seem to generate “clicks” and fan the fears of the equally uninformed). Ditto academic papers that imbed assumptions that are used to extrapolate results that are then absorbed and imbedded by other academic papers to further extrapolate results. Garbage in, after all… and then we apply the “magic” of compounding. 

However “accidental” its origins, in the space of just a few decades the 401(k) has become America’s retirement savings plan—in a way that the traditional defined benefit pension plan never really did (at least not in the private sector). That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs—and that has not been an accident. The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time—and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.

Those who denigrate or deny the success of the 401(k) typically exaggerate its value to higher-income workers (though their inclusion fosters designs like employer matching contributions, not to mention the very existence of such programs) and at the same time gloss over the strikingly high participation rate of even modest-income workers. Perhaps more significantly, they myopically overlook its enormous value to the middle class—who stand to have less proportionate income replacement from Social Security.

Yes, despite evidence to the contrary, and for reasons I still can’t fully comprehend, there remain critics who seem bound and determined to “throw away” the 401(k).

Though it seems to me that would be throwing the baby out with the bathwater…

- Nevin E. Adams, JD 

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[i] A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.” 

 

The ‘Catch’ in the Saver’s Match

 Of all the promising provisions in the SECURE 2.0 Act of 2022, one of the most expensive (as the federal government does math, anyway) is likely to be one of the most challenging to implement.

It’s not effective till 2027, so there’s still some time to figure it out—but I’m talking about the new Saver’s Match—a significantly retooled and expanded version of the Saver’s Credit (which is more properly referred to, at least by the IRS, as “Retirement Savings Contributions Credit”). 

As with the precursor Saver’s Credit, the Saver’s Match is focused on increasing the savings of lower-income workers by—in addition to what an employer may match—making a matching contribution from the federal government. The match has a maximum value of $1,000 at a rate of $0.50 per dollar contributed by a worker, up to $2,000 annually. 

The Employee Benefit Research Institute (EBRI) has estimated (from tabulations of tax filers with W-2 (wage) income) that 69 million had incomes eligible for the Saver’s Match. That would, of course, be dependent on how many of those contributed to a qualified retirement plan (employment-based or IRA), and there EBRI has estimated[i] that it might apply to 21.9 million individuals—compared with the 5.7% of taxpayers who claimed the Saver’s Credit in 2021.

Perhaps the most significant enhancement is that—unlike the Saver’s Credit—you don’t have to owe taxes in order to be eligible. Instead, the Saver’s Match is a refundable tax credit—and that alone is expected to dramatically increase the number of individuals taking advantage.

In addition, while the Saver’s Credit simply offset taxes owed (and thus put no new money in the worker’s hands), the Saver’s Match will actually be deposited to a qualified retirement account—employment-based or IRA. Now, there are some challenges ahead on that front—not the least of which involve the reporting and depositing of the match—but we’ll come back to that.

Finally, the Saver’s Match itself is more generous,[ii] both in amounts and eligible income brackets than the Saver’s Credit—which bodes well for more people taking advantage.

The Challenges

You don’t have to think long about the mechanics involved to find yourself saying “how in the world are ‘they’ going to do that?” Think about the reporting of the contributions—the federal government looking to confirm an account where the match can be deposited—the recordkeeping of this new match (not to mention tracking it to the point of distribution)—oh, and what changes might occur in location/retirement accounts between the point the contributions are reported and when the funds from the federal government might be available.

Beyond those obvious obstacles, a recent report from Pew outlines some legal limitations worth keeping in mind:

Roth exclusion. While Roth contributions qualify for the match, the match money cannot be deposited into a Roth IRA or plan account (it will be considered a pre-tax traditional contribution that will be taxed as ordinary income when withdrawn). While this might miss a lot of employment-based plan savers, those in state-run IRAs will need an alternative account for this deposit.

Employment-based plans don’t have to accept the contributions. While this might be good news for recordkeepers (or plan sponsors) who don’t want to mess with these deposits, it would require the individual to establish an account somewhere to accept it (likely an IRA).

Claw-back provision. The original Saver’s Credit had an offset for distributions[iii]—and so does the Saver’s Match. Eligible individuals who take early distributions from their account that exceed the amount of the saver’s matching contribution could be subject to additional tax, and considering these individuals are lower income, that might well be the case.

ABLE account savings are not eligible—though they were for the Saver’s Credit.

Those aren’t exactly “catches”—they are simply conditions regarding the Saver’s Match that are known and must be part of the planning and education. In fact, the biggest challenge of all may well be education. Surveys—notably from the Transamerica Institute—have routinely found that less than half of those eligible for the Saver’s Credit are aware of it. On the other hand, SECURE 2.0 requires[iv] the U.S. Department of the Treasury to promote the Saver’s Match.

And, assuming it all comes together, it could mean millions—perhaps billions—in new retirement savings. And that would be the biggest “catch” of all.

Fingers crossed.

 - Nevin E. Adams, JD

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[i] EBRI has also cautioned that this might be a conservative estimate, as it was based on W-2 compensation data only, and did not contemplate additions due to new long-term part-time eligibility rules, or contributions to state-run IRAs, not to mention the expanded incentives for new plan formation and the impact of automatic enrollment adoption by those plans, per SECURE 2.0 provisions.   

[ii] Savers with modified AGIs below $20,500 ($41,000 for married filing jointly) will qualify for a 50% federal match on up to $2,000 in retirement savings—that is, a maximum match of $1,000. This income threshold will be adjusted for the cost of living for years after 2027. Those who earn up to $15,000 more than this threshold ($30,000 more for married couples filing jointly) will qualify for a reduced match.

[iii] The amount of any contribution eligible for the credit is reduced by distributions received by the taxpayer (or by the taxpayer’s spouse if the taxpayer files a joint return with the spouse) from any retirement plan or IRA to which eligible contributions can be made during the taxable year for which the credit is claimed, during the two taxable years prior to the year the credit is claimed, and during the period after the end of the taxable year for which the credit is claimed and prior to the due date for filing the taxpayer’s return for the year. Distributions that are rolled over to another retirement plan or IRA do not affect the credit.

[iv] It further requires that Treasury “shall, not later than July 1, 2026, provide a report to Congress summarizing anticipated promotion efforts,” including “a description of plans for the development and distribution of digital and print materials; the translation of such materials into the 10 most commonly spoken languages after English as determined by data from the U.S. Census Bureau, American Community Survey; and communicating the adverse consequences of early withdrawal from an applicable retirement savings vehicle to which a matching contribution has been paid.”

No ‘Magic’ in These 401(k) Retirement Numbers

 Last week, a new report claimed to find a big jump in a so-called “magic” number for retirement, based on what survey respondents said they thought they’d need. As though they’d know.

It garnered quite a bit of coverage, including an article in The Wall Street Journal (and a comment from none other than Teresa Ghilarducci). While the “magic” number of $1.46 million didn’t seem astronomical (Professor Ghilarducci even commented that people often OVER-estimate their needs), that number jumped dramatically from $1.27 million a year ago—something the authors attributed to concerns about inflation.

There are many problems with reports like this—none of which the breathless reporting of the conclusions acknowledged:

(1) It’s an average—while we get some breakdown on age brackets, we know nothing about their incomes, where they live, their health, etc.  What someone needs (or thinks they need) living in New York City is (or should be) considerably different from the projections of someone living in Dubuque, Iowa.   

(2) It’s based on what people “think” (who have probably not given this any real thought).

(3) It’s surveying completely different groups of people a year apart, so drawing a trendline is a predictable, but dubious reality.

The good news is—this time—most industry “voices” pushed back on this “magic” number, albeit for different reasons. Mostly they cast shade on the notion that any one number would be right for everyone, and/or they preferred to rely on a percent of pay gauge. But those struck me as “nibbles” around the edge of the report; valid criticisms to be sure, but more about the result than the process used to produce it. 

Meanwhile, stories like this serve mostly to fuel the concerns that responsible human beings already have as they try to look ahead to a future decades ahead in a time of tremendous uncertainty. If they weren’t nervous before they saw these headlines, they surely are afterwards.

Now, those of us in this industry see—and produce—reports like this all the time. We look at those gaps (even the misperceived ones) as a challenge, an opportunity, a goal to strive for, a gap to close.  And thank goodness we do.

But while I wouldn’t for a moment suggest that those gaps don’t exist for some, nor would I advocate obscuring those realities, it would be naïve to think that those who want to shut down or “defund” private retirement plans don’t see these types of reports as an admission of failure, if not guilt. 

There are plenty of good stories to tell—and every day there’s an individual (perhaps many individuals) who confidently step off into retirement, buttressed by a history of consistent saving and encouraged by the support and guidance of a qualified retirement plan advisor. It’s a story that nobody seems interested in covering, but one in fairness that we don’t spend much time sharing, either.

I’d ask today that, in the future, you pause before sharing this kind of “the sky is falling” headline with your networks. Let’s start sharing the realities of the plans you work with, the retirement successes of the workers you support, the impact that holistic focus on financial wellness is having on the finances and emotional stress of those you serve… 

It may not be “magic”—but it sure matters.

- Nevin E. Adams, JD

A Tough Question

I’m rarely at a loss for words, but I was recently asked a question that gave me …pause.

It was a simple question really—John Sullivan and I were being interviewed on the 401(k) Specialist podcast—and Brian Anderson asked “which session are you most looking forward to at the NAPA 401(k) Summit?”

I was only too happy to defer to John while I gave the question some thought. But in truth, it was a little bit like asking a parent to name their favorite child.  Now, there are some sessions I am more interested in than others—but to pick one? 

Well, I just couldn’t do it—and fortunately Brian didn’t try to box me in (I did allude to a specific affinity for the LIVE Nevin & Fred podcast session, however).  

In fact, we do approach our content a bit differently than most, I think. While it’s gotten to be pretty common for events to boast of the pedigree of their steering bodies, many, perhaps most—are essentially no more than figureheads to the actual agenda development. They’re a group to whom the folks doing the “real” work of planning, structuring and implementing the event keep updated, mostly for a sense of validation and the occasional course correct. Oh, and so that the event can “show off” the luminaries that have agreed to lend their name (and face) to promote its bona fides.

Your Summit Steering committee has spent nearly a year putting this all together—and leveraging YOUR input on topics, each has aligned themselves with a specific workshop—literally “owning” that session. That means fleshing out the focus, lining up speakers/panelists, developing a core list of key takeaways, conducting trial runs/practices, and ultimately making sure that all the materials are in on time—and that on “game day” everybody shows up and does their part. As a result, I can pretty much promise you that you won’t be able to attend every session you’d like. In fact, I’d be surprised if you don’t find yourself torn between multiple sessions all going on at the same time throughout the event.

There are, of course, a myriad of ways to build and structure events—note here that I haven’t said a word about our keynotes, or even NAPA After Dark (that has in just a few short years emerged as the pinnacle of industry networking events). But, aside from the practical information, valuable insights, vibrant networking—and yes, world-class entertainment—it’s worth remembering that among all the (other) things that set the NAPA 401(k) Summit apart—unlike every other advisor conference out there—your NAPA 401(k) Summit registration helps support the activities of NAPA—your advocacy, information and education organization—not the bottom line of some corporate media organization or some private equity firm. NAPA not only informs and educates—it literally is your voice with regulatory agencies and legislative bodies both here in the nation’s capital—and across the nation.

Indeed, that voice is particularly essential this year, as the attacks—both overt and the insidious passive-aggressive types—are out and about with an unusual vigor in recent months. This being an election year—and one that seems particularly fraught with concerns—makes the current environment all the more precarious. It’s not hyperbole to suggest that the fate of the 401(k) could be in the balance.

So, if you’re one of the record 2,800+ arriving in Nashville next week—please lend your voice, support the ARA PAC, and get ready to leave Nashville full of energy, ideas, and a renewed fervor to make a difference. 

While you’re there, please stop me (I’ll likely be running) and say “hey!” Make sure to thank the Summit Steering committee when you see them—and the ARA/NAPA conferences staff as well—cause something this big doesn’t even get off the ground without a LOT of careful/thoughtful planning and on-site execution! 

And if you haven’t (yet) applied to be part of the NAPA DC Fly-In Forum—well, today would be a good day to do so before it fills up as well!

- Nevin E. Adams, JD