Missing the Mark

 A recent survey posed an intriguing question: Why are employees not participating in their 401(k)s? The answer(s) were jaw-dropping.

Now, I’ve previously expressed skepticism regarding workers’ perception of things like retirement savings needs, much less retirement savings balances, and over the years there has been plenty of anecdotal evidence to suggest that workers think they have a pension, despite plenty of actual data to indicate that’s a misguided fantasy. In sum, it seems that many, if not most, workers have a pretty distorted view of their financial circumstances, certainly as it relates to retirement.

That said, a recent survey by Principal takes that to a whole new level. 

That survey found that more than half — 59% — of workers who were not saving for retirement — thought they WERE saving for retirement. Nearly half (49%) thought they had been automatically enrolled, but nearly as many (41%) thought they had signed up on their own. And three-quarters (77%) said they had started saving as soon as they were eligible for the plan!

And if that wasn’t enough — turns out that while 83% say that they’d start contributing if they received a match ... 78% of those respondents are actually in plans that DO offer a match. Oh, and 70% of those who thought they were contributing (but weren’t) actually thought money was being deducted from their paychecks for that purpose.

Oy vey!

Some of this confusion might be a consequence of turnover — 40% said they had had more than one job in the past five years, after all. Let’s face it, it’s easy to lose track of things like benefit enrollment when you’ve changed jobs that often (or to assume that just because you were saving at your old job transferred to the new one). Some can doubtless be attributed to the industry’s growing reliance on automatic features — both by plan sponsors and workers — that lessens or eliminates the traditional need to be attentive to such things. Ultimately, a big part of it is likely nothing more than a combination of both the complexity of the process and the “distractions” of daily life.   

Now, I’m not quite sure how to remedy the passivity of those relying on their employer to sign them up, much less the myopia of individuals who aren’t even paying attention to the deductions on their paystubs. Maybe we should start mailing out statements to non-participants that showed a $0.00 balance (in red) that confirms their lack of an account — though my guess is they’d just file it away. 

Whatever the reason(s), this survey suggests that messages about the importance of saving for retirement — much less saving more — are likely going right over the heads of people who seem to think they already are. 

And in that sense, this survey also suggests that OUR assumptions about the efficacy and impact of our communications in inspiring better efforts — could be missing the mark as well.

- Nevin E. Adams, JD 

Why the Match Matters – to Employers

It has been heartening in recent weeks to see a number of employers announce plans to expand and increase benefit programs, offer bonuses, and increase the employer match. Better still, a recent survey indicates that more positive changes could lie ahead.

A decade ago, the headlines were filled with stories about a number of large firms announcing that they were cutting, and in some cases eliminating altogether, the employer match. While the vast majority of employers didn’t reduce those matches, it was nonetheless a stark reminder that those defined contributions are “defined” annually, not in perpetuity.

The Match Matters

There are a number of things that we know about the importance of the employer match; there’s the obvious (though sometimes glossed over) impact that an employer contribution means in terms of retirement security in simple dollars, for one thing. Indeed, the nonpartisan Employee Benefit Research Institute (EBRI) has estimated that if future employer contributions were eliminated for Gen Xers, their retirement readiness rating would decline from 57.7% to 54.6% – and that doesn’t consider what might happen to employee contributions as a result.

And then there’s the reality that those who it save in a retirement plan at work appear to save at/near the level matched (though the amount of the match matters less than the existence of the match), suggesting that it provides a savings target of sorts for workers.

There’s little question that the match does good things for workers and their retirement security – but, let’s be honest, the employer match that is “free” for workplace savers is anything but for the employers that provide it. Here’s why it’s worth the money.

Better Finances Mean Better Work

A 2017 Mercer study found that on average, people spend about 13 hours per month worrying about money matters at work – about 5 hours at the median, suggesting that some spend a lot more time than others thinking about such things.

EBRI’s Retirement Confidence Survey suggests that retirement confidence — and the retirement savings that ostensibly underpin that confidence – are at least somewhat connected. There’s a growing body of research that suggests that financial concerns take a toll on productivity. That’s not just retirement, of course – but it’s a big part of it.

Little wonder that more than 8 out of 10 (82%) finance executives surveyed by CFO Research with Prudential Financial, Inc., believe that their companies benefit from having workforces that are financially secure – and nearly as many believe that employers should assist employees in achieving financial wellness during their working years.

Better Benefits Attract Better Workers

Okay, every time somebody talks about the reasons to offer a retirement plan, “attract and retain qualified workers” is on, if not at the top of, that list. Thinking about that next generation of workers? Well, the 2018 Millennial Benefit Trends Report from Pentegra found that, asked if they take into account whether a job offers benefits when considering applying – well, pretty much everyone (96.77%) said yes. And, asked to rate five general benefits categories in order of importance, “401(k) Retirement Savings” easily outpaced the others, with about 4 in 10 rating it “extremely important.”

The CFO Research survey noted above also found that nearly two-thirds (63%) say that employee satisfaction with benefits is important for their company’s success, and 65% believe that employee benefits are critical to attracting and retaining employees.

Better Benefits Keep Workers

By far, the finance executives surveyed consider higher employee satisfaction (59%) and increased retention (53%) as the most important benefits of a focus on financial wellness.

State Street Global Advisors’ 2016 research suggests that there is a noteworthy interplay between people’s happiness with their working life and their financial well-being. In fact, reports indicate that financial wellness actually influences an employee’s happiness at work.

Poor Savings Postpones Retirements

A report by Prudential (aptly titled “Why Employers Should Care About the Cost of Delayed
Retirements”) found that a one-year increase in average retirement age results in an incremental cost (the difference between the retiring employee and a newly hired employee) of over $50,000 for an individual whose retirement is delayed.

Moreover, the report notes that it results in an incremental annual workforce cost of about 1.0%-1.5% for an entire workforce. This represents the incremental annual cost of a one-year delay in retirement averaged over a five-year period. Prudential notes that for an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost the employer about $2-3 million.

It’s been great to see so many employers announce enhancements to their benefits programs, cash bonuses and – most particularly – increases to their 401(k) matches. However, every year tens of thousands of employers commit to helping their workers save for retirement by committing to making a company match – and they have done so in good times and times that weren’t so good.

It’s a commitment that makes a huge difference – and one that shouldn’t be taken for granted.

- Nevin E. Adams, JD

The ‘Free’ Retirement Money Many Overlook

People often talk about the significance of the “free” money associated with the company match in retirement savings – but there’s another source of “free” money that is often overlooked.

I’m talking about the so-called Saver’s Credit, more precisely the Retirement Savings Contributions Credit. It’s a credit, not a deduction – a dollar-for-dollar reduction of tax liability.

Income Limits

For those who qualify, in addition to the customary benefits of workplace retirement savings, it could mean a $1,000 break on their taxes — twice that if married and file a joint return. In fact, for a moderate income saver, it can offset 50%, 20% or 10% of retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income.

Speaking of which, the Saver’s Credit can be claimed by:

• married couples filing jointly with incomes up to $61,500 in 2016;
• heads of households with incomes up to $46,125 in 2016;
• married individuals filing separately; and
• singles with incomes up to $30,750 in 2016.

Additionally, in order to claim the credit, individuals must be 18 years or older, must not be a full-time student, and cannot be claimed as a dependent on another person’s return.

5 Things You May Not Know

Here are five things you may not know about the Saver’s Credit:

• It applies to a variety of retirement savings. The Saver’s Credit can be taken for contributions to a traditional or Roth IRA (including myRA), a 401(k), SIMPLE IRA, SARSEP, 403(b), 501(c)(18) or governmental 457(b) plan, as well as voluntary after-tax employee contributions to qualified retirement and 403(b) plans.
• There are two deadlines for contributions. To qualify for the Saver’s Credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year. However, taxpayers have until April 18, the due date for filing a 2016 tax return, to set up a new individual retirement arrangement or add money to an existing plan for 2016.
• Rollover contributions aren’t eligible for the Saver’s Credit. Eligible contributions may be reduced by any recent distributions (for 2015, distributions received after 2012, and before the due date of the 2015 return, including extensions) from a retirement plan or IRA (a list of these distributions is available here.)
• You have to file Form 1040, Form 1040A, or Form 1040NR to claim the credit. The Saver’s Credit is (still) not available via the 1040-EZ form (though there have been legislative attempts to remedy that situation). However, if you use tax software, such as TaxAct or TurboTax, it should calculate the credit for you if you report your retirement contributions. Look for a completed Form 8880 in the attachments that your tax software provides.
• You only get the credit if you file for it. Just 24% of American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 15th Annual Transamerica Retirement Survey.

However, it’s not too late to save and get “credit” for doing so – make sure the participants you work with, and plan sponsors you work for – are aware.

- Nevin E. Adams, JD

See also:

• What’s Wrong With the Saver’s Credit?
• 7 Things You May Not Know About the Saver’s Credit (and 4 You Should)
• Save Twice with the Saver’s Credit

 

Facts In Circumstances

One of the things I have always enjoyed most about this job is the access to information—not only from our own research, but from any number of academic and professional organizations. It’s a lot to keep up with, of course, but it’s a great tapestry from which to construct a sense of where things are going, and what things need to get going.

There are, of course, things to be wary of. For example, surveys conducted on behalf of organizations supportive of a particular view—that suggest that most people agree with that view—are an obvious eyebrow raiser. Studies based on samplings that are limited in size or scope aren’t inherently flawed, but should always be taken with a grain of salt (for example, a survey of large plans isn’t always illustrative or predictive of the behaviors of smaller programs). My personal favorite: “studies” by the purveyor of a particular good or service that indicate that what people really want is—more of that particular good or service.

But there’s another kind of survey that can sneak up on even the most discerning—the survey that confirms what you already believe.

There was an example of that just about a month ago when Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who did the study for the Center for Retirement Research at Boston College, reported that employers with auto-enrollment had match rates about 7% below their non-auto-enrolling counterparts (see “Auto Enrollment Could Lead to Reduced Match”)--and from that finding, drew a not-unreasonable conclusion—that automatic enrollment could lead to situations where employers reduced their matching contributions.

And so it might. Generally speaking, automatic enrollment leads to more participants and, generally speaking, more participants leads to more matching dollars and, particularly for cash-strapped employers, more matching dollars can be a problem—a problem that could certainly result in a reduced (or suspended) match. Moreover, while matching contributions have often served as valuable participation incentives, in an era of automatic enrollment, those incentives might well play a different role, a role at a different level or, in the most extreme case, no role at all(1).

Now, it really doesn’t require a leap of faith to accept the premise of the study. And, if you’re like most people in our business, you probably saw the headline, skimmed over the results, and filed it under unintended plan-design consequences—or maybe even “bad things about auto-enrollment.” However, there’s a problem: Last week, the Employee Benefit Research Institute (EBRI) put out a report that claimed exactly the opposite; that, in fact, automatic enrollment has led to a HIGHER rate of match, at least among large plan sponsors (see “Study Finds Auto-Enrollment/Higher Match Link Among Large Plans”) (2).

In ordinary circumstances, we might be left to draw our own conclusions about two studies from reputable sources that seemed to draw two such widely disparate conclusions. This time, however, the folks at EBRI not only acknowledged the disparity, they offered insights into those differences. According to EBRI, the CRR/Urban Institute data was based on match rates constructed by the researchers, not actual rates of match—and then, this inferred rate was matched (no pun intended) against a separate listing of plans to determine which had, at some point, adopted automatic enrollment—though when that had been adopted vis-à-vis the match changes (if any) was not identified.

The bottom line: The conclusion drawn in the CRR/Urban Institute report (3) wasn’t illogical, but it was apparently based on such an oddly concocted methodology that, IMHO, it wasn’t worth the paper it was printed on. Consequently, when all is said and done, it doesn’t really add much to our insights about matching contributions and employer decisions—but it surely reminds us that we must always be careful not to jump to factual conclusions that, however reasonable, aren’t supported by the facts.

—Nevin E. Adams, JD

(1) See “Miss Match,” PLANSPONSOR Magazine

(2) The plans in the EBRI sampling weren’t exactly just increasing their 401(k) match, of course. They were also making changes to the defined benefit plans, and in some cases freezing their defined benefit plans while increasing their 401(k) match. More information is available HERE

(3) In their defense, the CRR/Urban Institute qualified their conclusion by saying that their study “suggested,” rather than established, a relationship between automatic enrollment and the matching level. That, however, is a nuance that is almost surely lost on most who read the report, including those who write about their conclusions for a broader audience.

Trend Spotting

Here’s a headline you won’t see this week: “Nobody Cut Their 401(k) Match Today.”

That’s right, even though there is a very good chance that it will be an accurate statement on just about every day, I’m betting it won’t even make its way into the business briefs section, much less a newspaper headline.

Not that employers aren’t making decisions to cut back on, or even suspend, their 401(k) match. On the other hand, you don’t have much trouble keeping up with that activity. Regardless of plan size or industry, these days, pretty much any plan that takes that step can count on making headlines—and every article beneath those headlines spends at least a sentence or two recounting the latest list of 401(k) match casualties.

Even in our publications, sadly. Let’s face it, it’s “news.”

With such incessant coverage, it’s hard to shake a sense that we have the makings of a trend—particularly for plan sponsors. Indeed, for employers looking for some respite in one of the more challenging economic times in memory, such coverage surely plants at least the seed of doubt about the necessity of the financial obligations attendant with such commitments.

Those developments notwithstanding, I’m pretty sure that, when it comes to their matching contributions, the vast majority of the tens of thousands of employers that offer 401(k) plans will make them in 2009 at the same level they did in 2008—and as they did in 2007, though you may never see a headline to that effect (a rare exception: “Most Employers Don't Plan to Reduce Contributions”).

That said, I’m not altogether sure where one crosses the line between a series of related occurrences and “a trend”—when the tipping point is reached, the Rubicon crossed….

What I do know is that we are still at a point where the decision to suspend a 401(k) match is “news.” And I dread the day—should it ever come—when it isn’t.

- Nevin E. Adams, JD

See also “IMHO: ‘Out of’ Practice” at