Will Tax Reform Create a Retirement Saving Teachable Moment?

Any time spendable income increases is a good time to talk about saving for retirement

401k, tax reform, retirement, TrumpTake a few minutes to explain tax reform.

Teachable moments are fleeting. They occur when circumstances align just right, and people become eager to learn more.

In this case, the extra income that the 2017 tax reform promises, combined with the extra income that some companies have pledged to employees, could make people more receptive to saving in workplace retirement plans.

By dropping the corporate tax rate from 35 percent to 21 percent, tax reform created a sizeable windfall for U.S. corporations. Many companies have responded by sharing a portion of the gains with their workers.

Some have announced employee bonuses, and wage and salary increases. Others are improving retirement plan matching contributions. The tax change may encourage some smaller businesses to introduce retirement plans.

If your plan-sponsor clients are offering similar rewards, it may be a good time to have a meeting with employees, in person or online. Focus the meetings on the benefits of saving—or saving more—for retirement.

If meetings aren’t an option, develop in-house communications that deliver the message. Some of the concepts you may want to incorporate include:

  • Reduce the chance of outliving retirement savings

The number one concern of Americans, including those with high net worth, is running out of money during retirement.

It’s understandable. The Government Accounting Office reported that one-half of households headed by someone age 55 or older have no retirement savings.

Among Americans who have retirement savings, the median savings is “…about $104,000 for households age 55-64 and $148,000 for households age 65-74, equivalent to an inflation-protected annuity of $310 and $649 per month, respectively.”

By increasing deferral amounts, employees reduce the possibility of running out of money during retirement. Higher incomes and bonuses may help bump up enrollment for plans that don’t include automatic enrollment features. For those plans, improving participation and contributions rates may help ensure highly compensated employees have the opportunity to contribute up to annual limits.

Note: Have the employees do the numbers. Bring out the compounding calculators and charts. Include graphics that show the potential growth of a $1,000 bonus invested over time, and the potential growth when half of any increase in earnings is invested over time. Offer a visual demonstrating the potential benefit of a higher matching contribution.

  • Let Uncle Sam fund 401ks

On January 11, the Internal Revenue Service issued new withholding tables that employers are expected to implement by February 15 (New W-4s and a new IRS tax calculator will be available soon.) The government anticipates that about 90 percent of American workers will receive bigger paychecks when the new tables are used.

Lower taxes may free up money for employees who have not had the resources to enroll in the plan before. It may provide participants with the means to increase current deferral rates.

Note: You may want to coordinate a workshop that includes both retirement plan and payroll providers. Employees may appreciate individualized help understanding new withholding rules, as well as understanding the benefits of the workplace plan.

  • Collect free money

If the company increased the match, it’s vital to revisit the topic of matching contributions. Twenty-five percent of plan participants don’t contribute enough to receive full employer matching. That’s the equivalent of turning down a 2.4 percent raise, on average. The advisory firm Financial Engines estimates participants miss out on about $24 billion in employer matching contributions every year.

A higher matching contribution provides an incentive for employees to enroll in workplace plans. It also provides a sound reason for plan participants to contribute more.

Note: Remind them of the importance of stretching a match. Rather than offering 100 percent on the dollar, up to 3 percent of pay, which results in a total contribution of 6 percent, have them consider matching 25 percent on the dollar, up to 12 percent of pay. Providing a lower match on a higher percent of income results in a combined contribution of 15 percent, which may better help participants secure their retirement.

Tax reform is expected to put more cash into the pockets of American workers for a number of years, and improves the bottom line for corporations. These changes may open minds. If so, plan sponsors could find that employees are more open to retirement education.

Terry Dunne is Senior Vice President and Managing Director of Retirement Services at Millennium Trust Company, LLC. Dunne has over 35 years of extensive consulting experience in the financial services industry. Millennium Trust Company, LLC acts as a directed custodian and does not provide tax, legal, or investment advice.

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