Father's Time

 As Father’s Day approaches, I’ve been thinking about my dad, the life he led, the choices he made, and his legacy.

Mind you, I’m not talking about money. In fact, I didn’t learn anything about finance from my dad.  Not that our family’s income provided a lot of “room,”—but Dad avoided big purchases with the fervor of Ebenezer Scrooge. However, he’d spend that much (and more) on small things (mostly books, which remain in jaw-dropping abundance in my mother’s home 18 years after his passing!).

My dad was a man of few words—spoken words, anyway. At 6’ 5”, he was an imposing figure, all the more so behind the pulpit from which he’d speak three times each week. He was a good speaker, though not a natural one.

He worked hard at it, studied his subject matter (hence the books), and practiced his presentation relentlessly each and every week. I always thought it odd that such a quiet, introverted man would choose that career, but it was something he felt called to do at an early age, though it couldn’t have been easy.

He had opinions but didn’t seek to impose them on others. Indeed, wresting opinions from him was difficult (and sometimes frustrating). Significantly, he walked his “talk”—his faith, his love and respect for all people, even those with whom he disagreed—and those were attributes in short supply, even then. He was always a voice of reason and tolerance.

Though I talked about my work several times over the years, for much of my working life, I don’t think my dad ever really understood what I “did.” Oh, he knew I worked for banks (when I did), figured that being a “senior vice president” had to be a good thing, knew that it had something to do with pensions (though he didn’t have one), and (eventually) grasped that it also had something to do with something called a 401(k).

But as for understanding what I actually did every day, well, he mainly cared that I enjoyed the work, that I found meaning in my chosen field, and that I was able—or felt I was able—to make a difference.

While Dad touched many people with his ministry, he touched thousands more with a random, almost accidental opportunity. Back in 1972, he was asked by a friend to write 13 guest columns in a denominational newspaper—an “opportunity” that went on for more than three decades (alongside his “day job”).

In fact, one of the great joys of my life came when 20 years into my retirement industry career, I was also presented with an “opportunity” to begin writing for a living—and my dad, though he surely didn’t always understand what I was writing about, could appreciate that I was eventually following in his (writing) footsteps. 

His impact on me and my life notwithstanding, I’m a different person than my dad, though his example is never very far from my thoughts. As a former child, I’ve tried to avoid repeating the “mistakes” my parents made—some of which, admittedly, in the fullness of time, weren’t mistakes at all.

As a parent, I’ve tried to share with my kids the lessons I’ve learned (and continue to learn), tried to spare them the pain that came with some of those, but also tried to give them the room they need—and deserve—to learn their own on the life path(s) they chose—though doing so is a life lesson of its own, and one with which I still struggle (just ask my kids).

I’ve tried to share with them some sense of money and its management, the thrill of having work that gives you joy (even if the where and who you do it with don’t always), the importance of having the right life partner…

Along the way, I’ve tried to make a point of telling them regularly how proud I am of them. But mostly, I try to tell them and show them how much I love them and do so as often as possible.

In this business, we tend to focus on things like bequests and legacies, the financial “leftovers” that are passed on to those we love. But those pale in importance and longevity to the legacy we can—and should—leave behind in the experiences and examples we pass on to our kids.

Love you, Dad.

- Nevin E. Adams, JD 

What Happened to the Three-Legged Stool?

Once upon a time, we talked about retirement as having three legs [i]: Social Security, workplace savings/pensions, and personal savings. But to a number of vocal pundits, the full burden has been put …on the 401(k).

But before there was a 401(k)—and even before the advent of ERISA—there was Social Security, a program designed to provide retirement income to working Americans. It remains absolutely integral to even the most rudimentary retirement planning calculation, and with good reason. 

That said, despite a looming financing shortfall—and a fairly widespread notion that those benefits aren't "enough" for a full retirement income replacement, you don't see headlines in the New York Times—or folks going on book tours—proclaiming that program was a "mistake" the way some do about the 401(k). 

The reality is that Social Security­—like the 401(k)—has undergone significant changes in scope, funding, and mission since its 1935 inception.

People are often confused as to the relationship between what they put into it and what they'll receive in benefits (it's a loose connection, at best), but—despite a couple of close calls over the decades, those checks that millions of Americans rely on for a majority of their post-retirement income (at least according to Social Security) have kept coming. 

That said, everyone seems to blithely assume that at some point, some way, someone (else?) will remedy the looming funding issue (if only to have it be another draw on the U.S. Treasury). But a mistake? 

No, despite those funding struggles (even though it's a pretty hefty—and mandatory—reduction of both individual paychecks and that of their employer) —there are (to my ears) no real threats to replace it, no actual condemnation of the mechanics that created the current situation—and nobody calls it a "mistake."

And no wonder—by all accounts, even in its current form, Social Security does a pretty solid job of replacing pre-retirement income levels for lower-income individuals. It might not be a luxurious retirement for them, but it seems to be doing what it was designed to do—even though that design has been allowed to morph/expand over the years to provide more benefits to more individuals. 

Indeed, most recent calls for a defined benefit plan "comeback" seem oblivious to the fact that Social Security provides exactly that type of benefit, adjusted for the cost of living, and not just for the lowest incomes.

So, what about the other two legs of that three-legged stool?

Well, personal savings has always been a challenge for American workers—and for many, the opportunity to save through payroll deduction at work has become their personal savings as well. There's a hazard in that reliance, of course—but many are likely saving more (and, thanks to the company match, gaining more) than they might otherwise.    

As for that third leg, the reality is that the 401(k) actually does a pretty good job of what workplace savings was always designed to do—supplement the foundation that Social Security provides—and yes, even for lower-income individuals. 

It has been—and continues to be—an essential element of retirement security for middle-income workers, for whom Social Security benefits alone likely fall short of their pre-retirement income levels and needs. 

Those of us who help people plan and save for retirement every day know that the 401(k) is, and remains an essential element of retirement security for most American workers.

Yet certain pundits—who seem to have no problem being handed a microphone (even by those who should know better)—continue to dismiss it as a "mistake." 

So, what happened to the three-legged stool? 

It's still very much with us—and we're all better off when we have access and opportunity to lean on them.

The 401(k) alone was never designed to be "enough." While its critical role in retirement security may well have been an accident, it's surely no mistake—and where would we be today without it?

 - Nevin E. Adams, JD

[i] According to Social Security, "the earliest use of this metaphor which we have been able to document was by Reinhard A. Hohaus, an actuary for the Metropolitan Life Insurance Company. Mr. Hohaus, an important private-sector authority on Social Security, used the image in a 1949 speech at a forum on Social Security sponsored by the Ohio Chamber of Commerce. Hohaus, however, had a slightly different "stool" in mind than came to be understood in later years. His three-legged stool consisted of private insurance, group insurance, and Social Security."

Retirement Realities

 Are you confident about your retirement finances? Apparently, and despite responses that undermine a rational level of confidence, many are.

Last week, the Employee Benefit Research Institute (EBRI) and Greenwald Research unveiled their 34th annual Retirement Confidence Survey (RCS). Now, I’ve commented previously about the dubious conclusions one can draw from personal sentiment surveys, not to mention those personal assessments of wealth and needs.

Those limitations notwithstanding, over the years, the Retirement Confidence Survey has helped uncover a number of interesting and intriguing perspectives about retirement, real and imagined―and no small number of what would appear to be unrealistic expectations about retirement: expectations around how long individuals think they will be able to work, for example, or that they will be able to work for pay after retirement.

Additionally, there have been indications that more individuals expect to receive a pension than would be suggested by the data regarding how many American workers are actually covered by such programs. However disconnected those perspectives seem from reality, their mere acknowledgement provides a valuable opening for discussion.

The RCS is, after all, based on phone interviews with participants and retirees, rather than an objective evaluation of their incomes and actual savings accounts. However, in view of the expressed “need” versus “have” amounts, it’s hard not to wonder how many are confident when they have no reason to be. Indeed, two-thirds (68%) of the workers and three-fourths (74%) of retirees surveyed were very or somewhat confident about having enough money to live comfortably in retirement—unchanged from a year ago (albeit a different group of individuals). And one might feel a bit better about that level of expressed confidence until you get to the datapoint regarding how many had made any attempt to figure out how much they would need, only to discover that (only) half (52%) had.[i]

But if worker pre-retirement confidence (still) seems disconnected from reality, the post-retirement version—from folks actually living IN retirement—remains reassuring. While over half of retirees say their overall expenses in retirement are higher than they originally expected, nearly 4 in 5 say they are able to spend money how they want, within reason.

Moreover, despite those higher-than-expected costs, significantly more retirees this year—3 in 10—say their overall lifestyle in retirement is better than expected[ii]—and more than two-thirds of retirees agree they are having the retirement lifestyle they envisioned—a statement with which a quarter of retirees strongly agree. And while three-quarters of workers expect to work in retirement, just 3 in 10 retirees report they actually do.

As a long-time RCS “watcher” (and, once upon a time, an RCS “voice”), you learn that people’s confidence rises (and falls) with the stock market—though there doesn’t seem to be a direct correlation between those movements and their actual retirement savings. People consistently report that they haven’t made even a single attempt to figure out what their retirement needs will be—and among those who have been “guessing” remains a popular response.[iii] The closer you are to claiming Social Security benefits, the more confident you are in receiving them—even though this year’s RCS notes that fewer than half of workers have reviewed the amount of their Social Security benefits at their planned retirement age, and only 59% have thought about how the age at which they claim Social Security will impact the amount they receive (and, despite their claiming status, just 77% of retirees have).

On the other hand, the mere attempt to figure out retirement needs seems to increase confidence.  Ditto working with an advisor. But the biggest boost in confidence seems to come from having a retirement plan; those reporting they or their spouse have money in a DC plan or IRA or have benefits in a DB plan from a current or previous employer were more than twice as likely as those without any of these plans to be at least somewhat confident (77% with a plan vs. 34% without a plan).

All, in all, for those looking to feel more confident about retirement (or looking to help others feel more confident), I’d offer the following suggestions:

• Get access to a retirement plan at work—and participate.
• Take advantage of any number of free retirement-needs calculators to get at least a sense of your likely needs (it probably won’t be as bad as you think).
• If your plan offers access to a retirement plan advisor—use them.

If you do all of those, you’ll not only feel more confident about retirement—odds are that feeling will be supported by reality.

- Nevin E. Adams, JD

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[i] Even more disquieting is the approach taken to do so. Previous versions of the RCS have found “guessing” to be a leading response. This year’s RCS details a number of “thought about” categories which wouldn’t seem to be very substantive preparation.

[ii] Of course, steady followers of things like the RCS may have a developed a disquieting view on what retirement would actually be like.

[iii] In a nice “two-fer,” those reporting that they or their spouse participate in a retirement plan were significantly more likely than those who do not participate in such a plan to have tried a calculation (59% vs. 19%).

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.”