Voldemort and Your 401(k)

Voldemort is a combination of French words loosly translated into “flight of death” or “flight from death.”

While some participants view retirement preparation favorably, others dread foregoing current consumption necessary to qualify for the employer match in preparation for an uncertain, unlikely, improbable, distant, future retirement (generally from some other, future employer). Worse, workers who identify themselves by their occupation might see retirement as a period without social connection with a dearth of activity.^[i]

What Are You Selling?

For the minority of workers whose top financial priority is retirement preparation, saving for retirement sells itself. For everyone else, not so much.

How do you market your 401(k) given that the vast majority of workers under age 50 do not have retirement preparation as their top financial priority? If we asked J.K. Rowling what’s best, she might paraphrase her nom de guerre for Voldemort: “Retirement-Must-Not-Be-Named.”

My decades of benefits experience highlighted three significant marketing gaffes:

• “High Deductible Health Plan” – A PPO with a $1,650 deductible in 2025 – that’s not so “high” as it is less than the $1,787 average from the 2024 Kaiser Family Foundation Survey
• “Salary-Reduction Saving Plan” – The initial name we used to describe 401(k) plans, and
• “Retirement Savings Plan” – Focusing today’s 401(k) solely on “saving for retirement.”

A 21^st Century 401(k)?

So, while I found the tête-à-tête between Shlomo Benartzi and Nevin Adams an interesting policy debate,^[ii] it never identified available practical solutions to the “leakage” and “restart” issues identified by Dr. Benartzi.

Twenty years ago, in my last plan sponsor role, we solved for those challenges:

• Embrace “auto enrollment” at hire
• Incorporate a default deferral percentage sufficient to qualify for the full employer financial support
• Don’t limit automatic features to new hires
• Embrace “annual enrollment” concepts in the form of perennially applied automatic enrollment and escalation, force participants to annually decide whether to save and how much to save, and time decision-making to coincident with any pay increase
• Maximize the savings opportunity by adding catch-up features
• Facilitate asset retention, asset aggregation and account consolidation via:
  • Rollovers from prior and subseqent employer plans and from traditional Individual Retirement Accounts (IRA),
  • Adding in-plan Roth conversion features, and
  • Adopting directed brokerage (If requirements were simplified, I would also add a Deemed Roth IRA limited to Core investments).
• Provide maximum pre-retirement “liquidity without leakage” by embracing the right kinds of liquidity, using 21^stCentury plan loan functionality,
• Avoid, minimize or eliminate the wrong kinds of liquidity (all pre-retirement withdrawals, including post-separation, pre-retirement withdrawals),^[iii]
• Confirm to workers that they are “customers” so long as they maintain an account and that their 401(k) is its own legal entity, separate from the plan sponsor/employer.

Marketing becomes simple – the 401(k) becomes the “Bank of Shlomo” or the “Bank of Nevin” where individuals, while employed and after separation, have financial incentives and nudges to:

• Contribute when first eligible
• Contribute even if retirement is not a priority, to fund their “bank account”
• Contribute on a pre-tax basis for those who need the increased liquidity from leveraging the deferral of federal and state withholding taxes
• Contribute even after separation via IRA contributions, followed by a rollover to the plan
• Leverage liquidity so workers can confidently contribute more than they believe they can afford to earmark for a distant, uncertain, perhaps unlikely retirement, and
• Avoid leakage and penalty taxes through tax-free liquidity in the form of plan loans, where loan repayment can continue post-separation via electronic banking, and where loans continue to be available post-separation to minimize penalty taxes, smooth consumption, moderate interest payments, manage sequence of returns risk, etc.

The best option for solving the challenges Dr. Benartzi identified would morph the 401(k) into a “Lifetime Financial Instrument” – confirming that workers can manage the account to maximize the 401k plan’s tax preferences and fiduciary and bankruptcy protections until they (and a spouse, if any) die.^[iv]

I always appreciate your comments, concerns, criticisms, or questions. Connect with me on Linked-in or contact 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 tax and legal implications, and you should discuss this matter with tax and 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, tax 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:

• More Leakage – Deeper in Debt!

^[i] Transamerica, Retiree Life in the Post-Pandemic Economy: 24th Annual Transamerica Retirement Survey, November 2024, “… More than four in five retirees (86%) cite positive word associations with the word “retirement,” (top two words were “freedom” and “enjoyment”) while 37% cite negative word associations (top two words were “health decline” and “financial insecurity”). Accessed 11/29/24 at: www.transamericacenter.org

^[ii] Nevin Adams, Et Tu, Shlomo – A Response to Benartzi’s Response, “…  You’ve now pointed more specifically to the Australian model where “workers remain by default with their first plan provider, even if they change jobs.” But as I am sure you know, there are some significant differences between that system and ours … mandatory employer contributions at a fixed rate … no access to that Australian system money before retirement … While it may not be a government-run program per se (beyond mandating contributions, restricting access until retirement and oversight of the providers), there’s clearly a strong government “influence.” … in the private sector, tenure and turnover have been remarkably consistent…since WWII. Lifetime employment is (and was always) a myth …” 10/31/24, Accessed 11/29/24 at: https://www.napa-net.org/news/2024/10/talking-points-et-tu-shlomo–a-response-to-benartzis-response/  See also:  S. Benartzi, I had a truly scary Halloween experience: I read an article that said I wanted the government to take over 401k plans! “In Australia, workers remain by default with their first plan provider, even if they change jobs. … Right now, you are stuck with the plan chosen by your employer. That discourages competition, but it also means many workers essential start the savings process over when switching jobs. That’s a big problem because it means that many small accounts are being cashed out, and that the typical saving rate takes a dive. … I believe that if we don’t fix the system, and take steps to ensure that all workers can save enough for a secure retirement, then the government will try to fix it for us.” Accessed 11/29/24 at: https://www.linkedin.com/posts/shlomobenartzi_i-had-a-truly-scary-halloween-experience-activity-7257741867977453570-zaPy/ See also: N. Adams, Et Tu, Shlomo?  As Halloween approaches, a leading behavioral science academic has embraced a truly scary idea that involves your 401(k) account. “… the big problem he seems to be trying to address is the reset of the default deferral rate at job change but his big government “solution” would — at best — still require some kind of massive employer-to-employer payroll data transfer — and the op-ed doesn’t even acknowledge the cost or challenges in developing or administering that transfer (or what might go wrong). He points to data that suggests that participants want tools like contribution acceleration to boost their savings — but apparently thinks individuals are unwilling or incapable of relaying that information to their next employer. …” Accessed 11/29/24 at: https://www.linkedin.com/pulse/et-tu-shlomo-nevin-adams-6kffe/ See also: S. Benartzi, It’s Time to Bring 401(k)s Into the 21st Century: The retirement savings plans don’t fit the increasingly mobile workforce of today. There’s an easy way to fix that. Wall Street Journal, 10/19/24. “… The 401(k) was designed as a supplemental retirement plan for employees who often had a pension that provided for lifetime income in retirement. … it has become much less common for workers to stay with a single employer throughout their careers. … smaller windfalls—like those left-behind 401(k) accounts—often are treated as income, and are thus far more likely to be spent. Large windfalls, in contrast, are more likely to be seen as assets that need to be saved for the future. … The problem, to put it all together, is this: The more mobile the workforce is, the more small accounts workers will have, and the more small accounts people have, the more likely they are to cash them out.” Accessed 11/29/24 at: https://www.wsj.com/personal-finance/retirement/update-401k-retirement-workers-f9abb373?page=1See also: S. Benartzi, A Simple Way to Get Workers to Save More for Retirement: Automatic enrollment and default savings rates have proved to be effective, but some employers think they are too paternalistic. Here’s an alternative. Wall Street Journal (WSJ) 2/3/24. “… Studies show that auto-savings programs have helped raise participation rates … when people have to choose a savings rate on their own, they often end up saving more than they would have had their plan had a default rate …” Accessed 11/29/24 at: https://www.wsj.com/personal-finance/retirement/automatic-retirement-savings-workers-benefits-2e0077cb?page=1

^[iii] J. Towarnicky, More Leakage – Deeper in Debt! Why Congress’ decision to increase liquidity via new distribution options increases leakage and impedes retirement preparation. 8/26/24, Accessed 11/29/24 at: https://401kspecialistmag.com/more-leakage-deeper-in-debt/ See also: J. Towarnicky, Is Congress Mad? Are You? SECURE 2.0 adds a variety of new leakage opportunities, Jack Towarnicky argues. Congress has made up its mind. Your turn. 401kSpecialist.com, 2/3/23, Accessed 7/21/24 at: https://401kspecialistmag.com/is-congress-mad-are-you/ See also: J. Towarnicky, Congress: Did You Ever Have to Make Up Your Mind? Are the tax preferences for assets in retirement savings plans intended for retirement? If so, you may want to stop proposing legislation that enables and encourages leakage, 401kSpecialist.com, 9/21/22, Accessed 7/21/24 at: https://401kspecialistmag.com/congress-did-you-ever-have-to-make-up-your-mind/

^[iv] J. Towarnicky, My Financial Wellness Solution: The 401(k) as a  Lifetime Financial Instrument, Society of Actuaries essay, 2017, Accessed 11/29/24 at: https://www.soa.org/globalassets/assets/files/resources/essays-monographs/financial-wellness/2017-financial-wellness-essay-towarnicky.pdf