Data and Research November 13, 2018

Middle Class Workers Report Mixed Financial Feelings

Many workers earning between $35,000 and $100,000 voice confidence about near-term financial goals, but this seems to be coming at the expense of long-term aspirations.

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A survey of more than 1,000 Americans, commissioned by CUNA Mutual Group, suggests many hold an assessment of their financial security that is overly optimistic.

The survey finds that middle class Americans (defined here as those making between $35,000 and $100,000 per year) tend to feel positive about their prospects for upward mobility. When asked to grade the ability of the middle class to achieve the American Dream, the average response was “B-.”

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 Steve Rick, chief economist at CUNA Mutual Group, says the middle class continues to experience stress from the long-term impacts of the Great Recession.

“We’re still seeing middle class families struggle with sticky wages, inadequate liquidity, high debt, insufficient savings and difficulty building wealth,” Rick says. “This population is among the most exposed to an eventual downturn.”

Despite these headwinds, Americans’ outlook is described as “sunny,” and is supported by respondents’ assessment (accurate or not) of their near-term financial security. According to the survey, 62% say they feel somewhat or very confident about their personal financial situation, and nearly half (46%) believe it is very unlikely that they will miss a loan payment over the next one to two years.

“This cautious optimism, however, belies a more troubling financial picture,” Rick says. “More than half of respondents are ill-equipped for an emergency, with 23% saying they have no emergency savings and 30% saying they only have one to three months’ worth.”

Worries about retirement

According to CUNA Mutual Group, few survey respondents feel prepared for retirement, with only 28% saying they’ll be able to retire with financial confidence in their lifetime. In fact, many seem to be more focused on short-term goals: 38% say they feel they’ll be able to buy a new car in their lifetime, and 37% say they’ll be able to travel internationally.

Sentiments among participants generally remained consistent across age, ethnicity, gender and other demographics. However, Millennials showed “significant divergence from overall trends when it came to many of the traditional components of the American Dream.” The survey shows fewer Millennials have prioritized buying a home or starting a family compared with the general population.

“A vibrant middle class is essential to a healthy, functioning economy and nation,” Rick says. “But we’re seeing a troubling picture emerge as their ability to manage their finances in the near term is coming at the expense of the long term. No one can control the economic winds, but the financial industry can provide the resources the middle class needs to break out of the cycle of economic insecurity.”

The 2018 CUNA Mutual Group survey assessed 1,258 U.S. adults ages 18 or older and making an annual income of $35,000 to less than $100,000. The survey was fielded in August 2018. Additional information about the company can be found at www.cunamutual.com.

Ask the Experts November 13, 2018

(b)lines Ask the Experts – Suspending Mandatory 403(b) Contributions After a Hardship Withdrawal

“Our plan is a 403(b) plan that has elective deferrals AND a mandatory employee contribution that is a condition of employment and thus is excluded from the 402(g) limit on elective deferrals.
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“Our plan allows for hardship distributions and follows the safe harbor, including the six-month suspension of contributions following a hardship distribution. I know that I need to suspend the elective deferrals, but what about the mandatory contributions? Should those be suspended as well?”

 

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Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

 

This is an interesting question, particularly when one reviews the relevant IRS regulations. First of all, the “relevant regulations” are not the final 403(b) regulations, as one would expect, but 401(k) regulations that address hardship distributions since the final 403(b) regulations incorporate the 401(k) regulations by reference. Specifically, we must look at Treas. Reg. Section 1.401(k)-1(d)(3)(iv)(E), as follows (boldface text is the Experts’ emphasis):

 

(E)Distribution deemed necessary to satisfy immediate and heavy financial need.—A distribution is deemed necessary to satisfy an immediate and heavy financial need of an employee if each of the following requirements are satisfied—

(1) The employee has obtained all other currently available distributions (including distribution of employee stock ownership (ESOP) dividends under section 404(k), but not hardship distributions) and nontaxable (at the time of the loan) loans, under the plan and all other plans maintained by the employer; and

(2) The employee is prohibited, under the terms of the plan or an otherwise legally enforceable agreement, from making elective contributions and employee contributions to the plan and all other plans maintained by the employer for at least 6 months after receipt of the hardship distribution.

 

We know that mandatory contributions are not, by definition, elective contributions, so we are left with the issue of whether or not mandatory contributions are “employee contributions.” Now, it would be great if Code Section 401(k) or the relevant regulations defined “employee contributions,” but they do not. However, the 401(k) regulations, as well as the 403(b) regulations do refer to employee contributions as after-tax contributions of the type that are subject to 401(m) testing and the Internal Revenue Manual includes a chart that defines employee contributions, sometimes referred to as “after-tax” employee contributions, as “Plan contributions from employees allocated to a separate account that are:

  • mandatory (they’re required to receive some benefit from the employer, such as matching contributions) or voluntary;
  • treated at the time of contribution as after-tax employee contributions;
  • not designated Roth contributions, loan repayments, repayments for the buy-back of cashed-out benefits (see IRC 411(a)(7)(C)), or amounts transferred or rolled over from another plan or IRA.”

 

Thus, it would appear that employee contributions would generally include both voluntary and mandatory after-tax contributions. However, the far more common type of mandatory contribution in a 403(b) plan is a pre-tax contribution that is either a condition of employment or pursuant to a one-time irrevocable election of whether or not to participate in the plan. These contributions, since they are not explicitly included in the definition of employee contributions in the manual, and are not referenced as employee contributions in the 401(k) and 403(b) regulations, would appear NOT to be subject to the six-month suspension requirement for hardship distributions, which would be consistent with the concept that such contributions are mandatory/irrevocable.

 

We note that the Bipartisan Budget Act of 2018 eliminated the six-month suspension period cited in the regulations above, effective for plan years beginning on and after January 1, 2019. The IRS has just issued a notice of proposed rulemaking to that effect.

 

 

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@strategic-i.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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