Data and Research November 30, 2015

Current Tax Treatment Benefits Employees Across Income Scale

A new whitepaper argues workers across the income spectrum get a pretty even shake when it comes to retirement benefits.
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Peter J. Brady is a senior economist in the retirement and investor research division at the Investment Company Institute, focusing on pensions, retirement savings, and the taxation of capital income.

In a new book, Brady highlights the importance of tax considerations in projecting retirement wealth, especially when it comes to setting state and national policy.

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“Policy discussions of tax deferral often focus on the reduction in taxes enjoyed by workers and ignore the higher taxes these workers will pay during retirement,” Brady explains. The front-end tax deferrals and tax-free growth in defined contribution (DC) plans obviously benefits employees, but it’s important to remember there is a difference between a tax deferral and a pure tax write off.

Considering the impact of taxes paid during retirement on total lifetime income, Brady argues tax deferral affects “when taxes are paid more than it affects the total amount of taxes paid over a lifetime,” a trend most apparent in higher-paid workers analyzed in the study. “For these workers,” Brady explains, “increased taxes during retirement offset, in present value, more than half of the reduction in taxes enjoyed while working.”

For those lower on the income scale, Brady highlights the fact that Social Security is “the primary component of the U.S. retirement system, and the benefits of the Social Security system are proportionately higher for workers with lower lifetime earnings.” Brady adds that, “contrary to conventional wisdom, the marginal benefits of tax deferral (the benefits of deferring an additional $1 of compensation) are higher, on average, for the lower-earning workers analyzed in this study than they are for the higher earning workers. Although the lower earners face lower marginal tax rates while working, their marginal benefits are higher because they experience the largest drop in marginal tax rates during retirement.”

NEXT: Approaches to benefit all 

Brady goes on to suggest the incentive to save in DC plans under the current tax code is not “upside down,” as some like to suggest.  

“Normal income tax treatment discourages savings by taxing investment returns,” he says. “Far from providing an ‘upside-down’ incentive to save, tax deferral equalizes the incentive to save by effectively taxing investment returns at a zero rate for all workers.”

Brady’s argument continues: “If a comprehensive reform of the federal income tax is undertaken, it is important that policymakers consider how all the changes included in any proposed reform would affect the progressivity of the overall tax system. The effect of specific tax provisions on progressivity should not be a concern. Tax provisions that address legitimate policy goals can be included in a reformed income tax even if they are not, by themselves, progressive.”

Brady concludes the justification for a progressive tax rate schedule “rests largely on the assumption that annual income is a reasonable proxy for a taxpayer’s economic circumstances, but the unevenness of earnings over an individual’s lifetime makes this assumption problematic.” Few, if any, of the federal-level tax reform proposals to surface in recent years earn high marks from this perspective, he adds.

Additional findings and more information about Brady’s upcoming book (January 2016) are presented in an ICI whitepaper, online here. 

Products November 30, 2015

An Alternative When Financial Wellness Isn’t in the Budget

Financial Finesse is targeting smaller employers with a service to help them create a low-cost financial wellness program.
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Financial Finesse founder and CEO Liz Davidson has written a new book, and her company is offering a service to help small employers use it as an employee financial wellness program tool.

Despite its name, “What Your Financial Advisor Isn’t Telling You: The 10 Essential Truths You Need to Know About Your Money,” the book encourages the use of a financial adviser for certain topics; it explains what an adviser can help consumers with. “It’s trying to open the eyes of the consumer to say, ‘Your financial security is your responsibility,’ but an adviser can enhance it,” Davidson tells PLANSPONSOR.

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The book includes a chapter about how to find the right financial adviser, and identify bogus advice. For example, it includes a chart showing market returns Warren Buffet achieved managing his money compared to those Bernie Madoff achieved managing investments. Buffet shows market volatility and variations, while Madoff shows a consistent line, pointing out to consumers what is more realistic.

The first chapter of the book tells consumers to keep their money where they make their money. Davidson explains that there is so much value in employee benefits, such as retirement plans, health savings accounts (HSAs) and voluntary benefits that cost employees less than they would pay in the retail market. “We want people to understand what their employers offer and maximize their benefits to suit their circumstances,” Davidson says. “As benefits move from a defined benefit to a defined contribution model, it is up to employees to understand how to create financial security.”

The book includes a chapter about reducing debt, and it explains good debt versus bad debt. “Most of us wouldn’t be homeowners if not for mortgages,” Davidson points out. Another chapter talks about taxes and tax planning, “and how an adviser can help with that,” she adds.

Davidson used what she has learned from her work at Financial Finesse, her educational experience and other resources, such as Ibbotson resources, to write the book. Some chapters are based on her personal experience as well, such as the chapter that discusses whether a person’s life partner is their best financial friend or worst financial enemy, and the chapter about how financial stress impacts health.

NEXT: Using the book to create a financial wellness program

Believing the book lays a good foundation for financial wellness, Davidson decided to incorporate it into the services Financial Finesse offers employees. “We realize smaller employers are budget-constrained, so those who purchase the book for employees and contact us will receive consulting about how to leverage the chapters in the book into full financial wellness program material.”

According to Davidson, the target for this service is employers with 100 or fewer employees. “We feel this is the group that will get the biggest value out of the service since other financial education options through Financial Finesse or other providers are typically much more expensive,” she says.

The retail price of the book is $27, but it is currently offered on Amazon and Barnes and Noble’s website for less than $20. According to Davidson, the cost of hiring Financial Finesse directly for a single day of workshops, webcasts or one-on-ones is triple the amount employers would pay for buying the book for each employee, “and that is just for a single day, as opposed to an ongoing series of workshops.”

A Financial Finesse planner will meet over the phone with the employer to help it create a plan to offer workshops about the different topics discussed in the book. The consultant can guide the employer to free or low-cost resources, with unbiased options prioritized—for example, the Social Security Administration, Consumer Financial Protection Bureau, and community financial literacy programs. For investing and tax planning, the Financial Finesse planner will provide the employer with a resource that can help them find local financial advisers along with guidance about how to vet them. 

For employers that want to go beyond workshops and provide more personalized guidance without breaking the bank, Financial Finesse has a relationship with Global Retirement Partners Advisor Alliance through which small companies can get access to Financial Finesse’s more personalized services—unlimited phone based financial coaching and the Online Financial Learning Center—at significantly discounted rates. 

Davidson says in January, Financial Finesse is launching a website that shares free resources employers can use with the book.

Interested employers can get started here.

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