Data and Research February 8, 2022

Having a Written Financial Plan Improves Savings and Asset Allocation

Research suggests written plans might especially help low- to moderate-income employees save more.

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The tangible benefits for employees of a having a written financial plan are clear, according to a Hearts & Wallets survey of 5,794 U.S. households.

The research found that Americans who have a financial plan enjoy increased savings, better asset allocation, more confidence in financial decisionmaking and more balanced portfolios, along with other financial wellness metrics. When it comes to asset allocation, those with a plan avoid the extremes in cash and equity allocations observed among households that don’t have a plan.

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According to the research, “The Power of Planning: Proven Benefits That Transform Consumer Financial Outcomes,” four of five U.S. households (82%) say they think about working toward long-term financial goals, with half (54%) having a plan. However, only one-third of households with plans report having written plans.

Americans with a written plan save more across all income levels. More than half (52%) of households with written plans save 10% of income or more versus 36% of households with unwritten plans. For households that think about goals but don’t have a plan, the most common behavior is to save modestly at 1% to 5% of income (29%) and about one in four do not save at all.

Written plans may be especially important for low- and moderate-income levels, the research suggests. One-third of households with less than $48,000 in annual income with a written plan save 10% or more of income, compared with about one in 10 households in that income range without written plans.

“Educating low- and moderate-income households on the benefits of written plans may help them to build a stronger financial future,” says Beth Krettecos, Hearts & Wallets subject matter expert.

Schwab’s 2018 Modern Wealth Index found that having a written financial plan can lead to better “daily money behaviors,” and this goes for those near the bottom of the income scale. According to the Charles Schwab analysis, among those without a written plan, nearly half (45%) say this is because they don’t think they have enough money to merit a formal plan. Next-most common, 20% say crafting a formal plan simply never occurred to them, and another 20% say they wouldn’t know how to go about getting a plan.

“The idea that financial planning and wealth management are just for millionaires is one of the biggest misconceptions among Americans, and one of the most damaging,” warned Joe Vietri, senior vice president and head of Schwab’s retail branch network, at the time of the study. “Whether people think they don’t have enough money, believe it would be too expensive or just find the whole concept too complicated, the longer they wait, the harder it is to achieve long-term success.”

Households with any kind of financial plan experience improved emotional financial wellness, such as feeling on track for retirement and being more confident in financial decisionmaking, the Hearts & Wallets survey found. Plans, and particularly written plans, are also associated with bigger emergency funds.

A previous Wells Fargo/Gallop Investor and Retirement Optimism Index found 43% of investors with a written plan are highly confident they are headed toward a comfortable retirement, whereas 23% of those without a written plan feel highly confident.

“Although we are experiencing rising account values and optimism, it’s important not to underestimate the importance of a thoughtful strategy and  a written plan not only for saving and investing, but also for drawing down funds in retirement given the complexities of longevity, taxes and when to begin Social Security benefits,” said Joe Ready, head of Wells Fargo Institutional Retirement and Trust.

The Hearts & Wallets report can be ordered from here.

Ask the Experts February 8, 2022

Maximum Deferral When a 401(a), 403(b) and 457(b) Are Offered

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“Our public university sponsors a 401(a) defined contribution plan, as well as 403(b) and 457(b) plans. The majority of our employees are eligible for all three. What is the maximum elective deferral that an employee eligible for all three plans can make for 2022?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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We partially addressed this question in our Ask the Experts column on the combined 403(b)/457(b) limit for public 403(b)-eligible employers, but that column needs to be updated for 2022. The general elective deferral limit for a 403(b)/457(b) plan combo would be $41,000 in 2022 ($20,500 to the 403(b) plan and $20,500 to the 457(b) plan). If an employee received EMPLOYER (i.e., nonelective) contributions to the 457(b) plan, that $20,500 limit for that plan would be reduced by those contributions. Further, if any employee received EMPLOYER contributions in EXCESS of $40,500 to the 403(b) plan (an unusual event in the Experts’ experience), the amount in excess of $40,500 would also effectively “crowd out” or reduce the $20,500 limit to the 403(b) plan (the limit on combined employer and employee deferrals to 403(b) accounts for 2022 is the lesser of $61,000 or 100% of includible compensation for the employee’s most recent service year).

If an employee is age 50 or older by the end of 2022, and both the 403(b) and 457(b) permit the use of the age-50 catch-up election, the combined elective deferral limit would increase from $41,000 to $54,000 ($20,500 + $6,500 catch-up to each plan). If your 457(b) plan offers the three-year catch-up election, the small number of employees who would qualify for that could defer up to $68,000 for each of the three calendar years prior to normal retirement age instead of $54,000 (for more on the three-year annual catch up election, see “Does the RMD Age Change Affect Rules for Special Catch-Up in 457 Plans?” In the rare event that your 403(b) plan offers the 15-year catch-up election, which would allow qualifying employees to defer up to an additional $3,000 to the 403(b) plan, the deferral limit would increase from $68,000 to $71,000 for those employees. For details on all these limit calculations, see the Ask the Experts column linked above.

Of course, all of these scenarios assume that employees have that much in compensation to defer in the first place, as employees may only defer up to 100% of compensation less any mandatory deductions, such as those for FICA federal payroll tax, to a retirement plan.

A 401(a) plan does not allow for pre-tax elective deferrals, nor does it allow for Roth contributions, unless it contains a 401(k) feature, which governmental entities are generally not permitted to have, except for some grandfathered plans. However, if the plan has an after-tax contribution provision, an employee could generally make after-tax contributions up to the lesser of the plan limit or $61,000, less any employer contributions to the 401(a) plan in 2022.

If short, your eligible employees can defer quite of bit of money to your combination of plans!

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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