“I’ve never been a huge fan of Roths. I always felt they’ve been oversold.” It’s just one of many surprising statements made by Ted Benna when discussing 401(k)s, IRAs and the states’ recent foray into mandated retirement saving.
Benna, who famously discovered the savings and investment vehicle in that late 1970s in Section 401k of the Internal Revenue Service code, takes issue with OregonSaves specifically, as deadlines are approaching for compliance.
Surprisingly, the Oregon business community is still largely oblivious, according to Benna, and could result in “nasty” fines that could be put to better use as contributions and matches.
“Very few of them know that they’re facing the deadline,” he says. “They have to have a plan or they’re going to pay a fine. That’s a major danger. It’s astounding to me, the lack of knowledge about that.”
He’s equally astounded by the lack of knowledge surrounding more effective and appropriate (as well as cheaper) alternatives, including one he’s offering through his own company Benna401k, which includes a free “Oregon Decision Guide” to help make employers more aware.
“You start with the expense issue,” Benna begins. “We have an alternative here that gives participants the same investments available in the OregonSaves plan at 8 basis points versus 100 basis points. As we know, that becomes very significant over a 20- or 30-year period. That would be No. 1.”
No. 2 is the fact that OregonSaves has an aforementioned Roth (in addition to a traditional IRA option for savers who need to recharacterize their contributions), as do 10 other states that have already implemented or are implementing payroll-deduction IRA programs like the one Oregon pioneered two years ago.
Why a Roth approach may be wrong
“The one thing that always bugged me when I was in meetings with noted financial writers is that they would say, ‘Do you expect tax rates to be higher or lower in the future?’ as if that was the only issue to think about. Many retirees will have significantly less taxable income when they’re retired.”
Referencing his widely received white paper, “To Roth or Not to Roth,” he compared tax rates today with where they were in 1997 with Roth’s inception. Unsurprisingly, they’re lower today.
“When dealing in the smaller market, the primary goal should be accumulating a nest egg faster rather than slower, because life is so uncertain,” Benna explains. “There’s a reasonable possibility that well before you reach retirement, life may throw a significant curve. Having a 40% or 50% bigger nest egg at that point in time, even if to some extent it may be taxable, is certainly a big plus.”
Because participants with state-sponsored retirement requirements are mandated to save, they should have the option to do it either way—taxable or after-tax.
“An advantage we give is that, of the four models we have in the free guide, the first two are payroll deduction IRAs,” he says. “They both include something that OregonSaves doesn’t, and that’s the potential to have a matching employer contribution. It’s an alternative to using the dollars that would otherwise be paid in a fine; it’s a way to help fund a modest employer contribution of some type.”
He also offers SEP and SIMPLE IRA options, which he feels have not gotten promoted the way they should.
“What I’ve run into over the years is clearly the fact that 401(k)s are the wrong plan for many small businesses,” he (again) surprisingly states. “These are attractive alternatives for them that make more sense than the 401(k), even with a MEP (Multiple Employer Plan). I’ve had mixed feelings about the MEP. It will provide some operating efficiencies, but you still have all the legal complexities that you have with a small employer; top-heavy, nondiscrimination testing won’t go away.”
Advisors need to offer alternatives
So, are state-sponsored plans ultimately good in some way for participants, and what do they mean for advisors?
“Advisors haven’t been involved in this at all because there’s no money in a plan that starts out with $20,000 or $30,000 a year, maybe,” Benna notes. “I’m a supporter of mandates, even though I’m not a friend of big government, but clearly small employers have to do this. I learned over the years the most valuable benefit participants get from a 401k is semi-forced savings via payroll deduction. Most don’t do it otherwise. We’ve had 40 years now and we haven’t really closed the [coverage] gap. Mandates are the only way that is going to change.”
Where advisors need to play a role, he adds, is by helping small businesses know they have better alternatives. And it gives them the potential to make money down the road as accounts grow both inside and outside of the state-run plans (meaning rollovers).
Regardless, states are likely to use this platform to compete more broadly with the private sector at some point. Clearly, that is California’s intent with its plan, Benna claims. [Editor’s note: Eric Lawyer, Policy Director with CalSavers, responds: “We have consistently stated that our purpose is not to compete with the industry.”]
In May 2020, OregonSaves drops down to businesses with between one and four employees that must have a plan. Given the deadline, are businesses receptive to his message?
“No, they really aren’t at this point,” he concludes. “They’re still oblivious to it. Even in the professional community with the accountants, attorneys and financial people out there. What’s really been frustrating and bizarre is that I can’t get the (Oregon) financial writers to address this. The only way we’ve been able to get any attention out there is by paid advertising.”
401(k) Specialist Managing Editor Brian Anderson contributed to this article.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
