Data and Research November 8, 2017

Consumers Not Receptive to Employer-Provided Retirement Planning Resources

Yet, retirement savings accumulators, especially younger ones, are seeking help more than five years ago, research finds.

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Only about one third (35%) of U.S. consumers use or would use “retirement planning resources provided through employer” while 41% do not or would not, according to Hearts & Wallets research.

Younger Americans are most receptive, while pre-retirees had the biggest increase, of 15 percentage points, in receptivity.

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One in three (32%) Accumulator households does not know where their income in retirement will come from in 2017, and there was no real improvement compared to 2016. Understanding about where income in retirement will come from increases dramatically above the $100,000 in investable assets threshold, jumping from 36% in the $100,000 and under group to 62% in the $100,000 to $500,000 group, and even higher in the asset classes above $500,000. 

Personal finance tasks are getting more difficult for Accumulators, especially younger ones. And they are seeking help more often than five years ago. Steep increases include “getting started saving and investing” (18% vs. 8%) and “paying off or consolidating debt” (21% vs. 13%). But there are major advice gaps where Accumulators aren’t getting help. The biggest is “identifying what year I might stop working full-time.”

The survey found that “Build up an emergency fund” is this year’s No. 1 financial goal, cited by 49% of consumers nationally. The goal of “take a vacation” is second at 39% of 12 goals tracked by Hearts & Wallets IQ Database. Vacations are high on the list for younger consumers, as the goal of a vacation is neck and neck with other goals. Younger people rank “build up an emergency fund” as the top goal with 64% and “take a vacation” as second with 60%.

In contrast, the goal of a vacation drops for older consumers. Consumers ages 53 to 64 are focused on the future work-life balance goal rather than immediate vacations. Their top goals are “work less when older” (47%) and “stop work/retire when older” (46%), and they are focused on investing to make that happen.

“People who laugh about the desire to take a vacation instead of saving for retirement misses a key insight into what drives consumers,” Laura Varas, CEO and founder of Hearts & Wallets, says. “Current versus future work-life balance is an important issue, and the need to refresh and reset should be acknowledged. Younger consumers need help aligning current work-life balance with the equally important goal of setting themselves up for success in the decades to come. The reality sets in for older consumers when they realize they need to prepare for the long vacation that comes when they stop working voluntarily or involuntarily. In effect, the whole conversation about retirement is actually work-life balance.”

Health care is a top issue across consumer life stages, with important nuances from the youngest to the oldest. Purchase of health care, long-term care or life insurance is one of the top three actions either taken during the past 12 to 18 months or planned by Accumulators as well as Pre-Retirees and Post-Retirees.

“Consumers are really focused on the unpredictability of future health care costs,” Varas says. “Financial firms can help by including saving for future health care in advice and guidance, without preying inappropriately on this fear. Improving health savings account (HSA) solutions can also help firms help consumers prepare for future.”

Compliance November 7, 2017

Tax Reform Bill Would Be Unfavorable to NQDC Plans

In addition, tax-exempt employers would be subject to additional taxation rules.

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While the tax reform bill issued last week includes many favorable provisions for employer-sponsored retirement plans, the proposal effectively eliminates nonqualified deferred compensation (NQDC) plans as tools for tax planning available to executives and public companies and would significantly restrict or effectively eliminate common forms of long-term incentive compensation, according to a Benefits Brief from Groom Law Group, Chartered.

Groom attorneys write that the bill “restricts future deferrals under nonqualified programs and would also cause existing deferred amounts to be includible in income by no later than 2025.” Specifically, all nonqualified deferred compensation related to services performed after 2017, including amounts under tax-exempt employer 457(b) and 457(f) plans, and the related earnings, would be taxed when it vests, rather than when it is paid. In addition, amounts of nonqualified deferred compensation attributable to services before 2018 would be taxed during the later of 2025 or the year of vesting. The bill includes all stock options and stock appreciation rights under this early income inclusion rule.

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“These proposed changes have the effect of eliminating the opportunity for an executive of any company or organization to defer taxation of earned income outside of a tax-qualified retirement plan and would trigger income recognition for long-term incentives once a continuing service vesting condition lapses, effectively without regard to when the amounts are actually payable,” the Groom attorneys write.

According to the Benefits Brief, the bill would expand the definition of compensation for purposes of the $1 million deduction limit to include all remuneration paid for services by eliminating the performance-based compensation and commission exceptions for compensation paid to top executives at publicly traded companies. It would realign coverage of the limit with the Securities and Exchange Commission (SEC) disclosure rules to include compensation paid to the company’s principal financial officer in addition to the principal executive officer and the other three most highly paid executives.  In addition, if an individual is a covered employee for any tax year commencing after 2016, his or her compensation would remain subject to the deduction limit in subsequent tax years, even if he or she is no longer a covered employee or the amounts are paid to a beneficiary.

In addition, the bill would impose on a tax-exempt employer a 20% excise tax on compensation in excess of $1 million paid to any of its top five most highly compensated employees, as well as on payments contingent on separation from employment paid to a covered employee in excess of three times his prior average annual compensation. According to the Groom attorneys, these changes regarding top executives remuneration would be effective for tax years beginning after 2017 without a grandfather or transition period.

The attorneys note that historically, many state and local governmental 401(a) plans have taken the position that, because income of the related trusts would generally be exempt from tax under Internal Revenue Code Section 115, such trusts are not subject to unrelated business income tax (UBIT) under Code section 511. However, Section 5001 of the House tax reform bill would amend Code Section 511 to specifically provide that an organization or trust exempt from taxation under Code section 501(a) (such as a 401(a) plan trust) will not be exempt from UBIT solely because it excludes amounts from gross income under another Code provision. “Therefore, under Section 5001, state and local governmental plans would likely be subject to unrelated business income tax under Code section 511 regardless of the provisions of Code section 115 (or any other Code section under which a plan may claim tax-exemption),” the attorneys write.

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