One blog I regularly read (and highly recommend) is Jim Blankenship’s “Getting Your Financial Ducks In A Row.”[i]
His most recent post, Organization, Efficiency & Discipline, June 12, 2023, offers valuable insight for many 401(k) participants—specifically: “Simplification is usually beneficial to any pursuit.” And “Keeping things as simple as possible helps to ensure that you’ll stay with your plan.”
His guidance includes: “If you can break down the basic principles of whatever “big thing” it is that you’re hoping to accomplish into simple concepts, you’ll do well in your pursuit.” (See sidebar)
Not Simple Enough for Me
My household finances might have benefited had we followed that process. Might have worked for you, too!
But, despite my undergraduate business economics and MBA degrees, we never really adopted formal financial goals and strategies.
Debbie and I married in our early 30s. My memory is that in the first two years of our newly formed household, we had six noteworthy financial priorities:
- Family needs (including some college funding for nieces and nephews)
- Emerge from debt (student, car, credit cards, etc.)
- Fund ongoing graduate education
- Start to fund college for our newborn son Andy (and later our daughter Dayle)
- Establish Andy’s (and later Dayle’s) Ben Franklin account.
- Accumulate funds for a down payment on a home.
Even though I started my employee benefits career in 1979 and knew retirement preparation was more likely to succeed the earlier saving started, neither retirement nor wealth accumulation was on our list. As best as I can recall, only once did we formally adopt a goal and process as defined here – #5 above.[ii]
Not Simple Enough
Most lower- and middle-income households under age 45 are living paycheck to paycheck.[iii] Many of them are in debt. And most American workers don’t have sufficient disposable income to touch all the financial bases at the same time. So, identifying numerous daily, short-term, and long-term goals and adopting strategies for each may be a futile exercise.
In my last plan sponsor role, we changed plan design to morph our 401(k) into a “lifetime financial instrument”—so workers would save and gain tax-preferred access to assets along the way to and throughout retirement:[iv]
- Perennially-apply automatic features—enrollment, escalation, investment and decumulation[v]
- Adopt Target Date Models comprised of Core options (including index investments) as the QDIA
- Facilitate asset aggregation and account consolidation (rollovers) and asset retention strategies
- Leverage tax preferences (pre-tax or Roth depending on circumstance) and utility—both the 401(k) and Health Savings Account[vi]
- Prospectively eliminate in-service and hardship withdrawals, curtail post-separation, pre-retirement distributions
- Adopt 21st Century plan loan processing (electronic banking, line-of-credit structure, behavioral economics tools and processes) for “liquidity without leakage along the way to and throughout retirement.”
Prior to the changes, 24% of eligible workers were not contributing and 41% of eligible workers were not contributing enough to receive the full employer contribution.[vii] After the changes were fully phased in, 95+% of eligible workers contributed enough every year to receive the maximum employer financial support. Combined, aggregation, consolidation, retention, and liquidity enabled workers to leverage the tax preferences and employer financial support to meet their daily, short-term, and long-term financial needs and goals.
Plan sponsors who “morph” their 401(k) and HSA into “lifetime financial instruments” will increase worker participation, contributions, and wealth accumulation—maximizing utility and minimizing leakage—while simplifying financial decision-making for younger, lower- and middle-income Americans who are financially fragile.
Happy to discuss the steps your plan might take to morph it into a “lifetime financial instrument.”
I am always interested in your comments, corrections, criticisms, and suggestions. Send them to me at jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications, and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
SEE ALSO:
• Let Ben Franklin Create ‘Middle Class Millionaires,’ Eradicate Poverty in America
[i] See: https://financialducksinarow.com
[ii] J. Towarnicky, From Cradle to Retirement, Diapers to Depends – Re-defining “Long Term” Investing. Part 1 of 2, 11/29/17, Accessed 6/13/23 at: https://www.psca.org/news/blog/cradle-retirement-diapers-depends-re-defining-long-term-investing-part-1-2
[iii] American Payroll Association, Number of Americans Living Paycheck to Paycheck Has Increased, Getting Paid in America – 2022 Survey, 9/14/22. “Seventy-two percent of Americans would experience financial difficulty if their paychecks were delayed for a week” (some or significant difficulty in meeting current financial obligations – delayed, not missed, and delayed only one week). Accessed 6/13/23 at: https://www.prnewswire.com/news-releases/number-of-americans-living-paycheck-to-paycheck-has-increased-301624801.html
[iv] J. Towarnicky, Debt or Deferrals . . . College or Contributions? A 401(k) Can Do Double Duty, Benefits Quarterly, 3rd Quarter, 2019. “Although few sponsors of retirement savings plans are willing to assume responsibility for addressing every financial issue and decision that workers must make, most plans can succeed as a holistic, lifetime financial instrument. Only a few changes may be needed to enable a 401(k) to do double duty: debts and deferrals, college, and contributions.” Accessed 6/13/23 at: https://www.iscebs.org/Resources/BQ/Pages/BQ-executive-summaries-2019.aspx
[v] J. Towarnicky, Is It Time for Full Auto? Benefits Quarterly, 1st Quarter, 2020. “Today, 60+% of surveyed plans have one or more automatic features. However, only a handful have migrated to a “full auto” design. This article describes one plan’s transition—from a passive strategy of “access while employed” to a full auto design.” Accessed 6/13/23 at: https://www.iscebs.org/Resources/BQ/Pages/BQ-executive-summaries-2020.aspx
[vi] J. Towarnicky, Maximum Utility: Your HSA Can Do Quadruple Duty, Benefits Quarterly, 2nd Quarter, 2021. “Once considered to have only limited value for a minority of workers, more now view HSAs as a “health and wealth” rewards strategy. … HSAs are capable of quadruple duty and more—that HSA offers superior utility (compared to the 401k) that plan sponsors and employees cannot afford to forgo.” Accessed 6/13/23 at: https://www.iscebs.org/Resources/BQ/Pages/BQ-executive-summaries-2021.aspx
[vii] J. Towarnicky, My Financial Wellness Solution: The 401(k) as a Lifetime Financial Instrument, Society of Actuaries, 2017, Accessed 6/13/23 at: https://www.soa.org/globalassets/assets/files/resources/essays-monographs/financial-wellness/2017-financial-wellness-essay-towarnicky.pdf
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
