Data and Research January 23, 2018

Millennials Face Many Challenges in Preparing for Adequate Retirement

However, researchers say their outcome could possibly improve, given the fact that they still have a long time horizon to save, the markets could deliver strong returns and the government could save Social Security.

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Retirement prospects for Millennials are particularly challenging, the Center for Retirement Research at Boston College says in a new brief, “Will Millennials Be Ready for Retirement?”

Many Millennials, those born between 1981 and 1999 and, thus, between the ages of 37 and 19, began their careers in a tough job market following the bursting of the dot.com bubble in 2000 and the Great Recession of 2008 and have substantial student debt, The Center for Retirement Research says. Further, many employers are cutting back on pensions and health care benefits, and Millennials’ life spans will likely be higher than previous generations due to increasing longevity. They also face the prospect that Social Security benefits will be cut or, perhaps, not exist at all, and they will have to grapple with rising health care costs.

The Center says that the story about Millennials starts off on a positive note, as Millennials are more likely than earlier generations to have a college degree. Citing a 2014 Pew study, the Center notes that the median income for Millennials with a college degree is 63% higher than for high school graduates. Their unemployment rate is also 8% lower and they reported greater job satisfaction.

However, because many Millennials entered the job market between 2002 and 2012, fewer male and female Millennials have a job than older generations. Furthermore, the Center says, “regardless of their ability to find some type of job, one apparent struggle for both men and women has been finding quality jobs—career-track positions with good compensation.”

They also earn less than older generations and are less likely to be offered a retirement plan and health insurance: “The percentage of [Millennial] workers participating in a retirement plan is sharply lower for both men and women. This lack of a savings vehicle is a particular concern given that individuals who do not have a workplace retirement plan rarely save for retirement on their own. Similarly, a much smaller share of male and female workers are covered by employer-provided health insurance.”

Poorer job prospects and student debt have caused the percentage of Millennial men married at age 25 to be less than half for late Baby Boomers and only two-thirds of that for Gen Xers. Likewise, by age 35, 50% of Millennials own a home, compared to 60% of late Baby Boomers and Gen Xers.

The Center found that among Millennial households between the ages of 25 and 28, 49% are saddled with student debt, compared to 29% of late Boomers and 32% of Gen Xers in that age group. “Research has shown,” the Center says, “that young workers with student debt have less in retirement plans and are more likely to end up at risk in retirement. The increase in student debt, low rate of home ownership and low rate of participation in retirement savings plans has produced a big decline in the median ratio of wealth to income compared to earlier cohorts. Saving for retirement is clearly getting harder for Millennials.”

The Center for Retirement Research concludes that the outcome for Millennials could possibly improve, given the fact that they still have a long time horizon to save, the markets could deliver strong returns and the government could save Social Security. The full “Will Millennials Be Ready for Retirement?” brief can be downloaded here.

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Ask the Experts January 23, 2018

410(b) Coverage Testing for Firms With Both 401(k) and 403(b)

“I work for a firm that recently took over as third-party administrator (TPA) for the retirement plans of a large private tax-exempt 501(c)(3) hospital.

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“The entity sponsors a 403(b) plan for the vast majority of its employees, but also sponsors a 401(k) for a small wholly-owned for-profit physicians’ practice. Since both are required to be tested as plans of a single employer under the controlled group rules, it would appear that the 401(k) plan, which also provides for a matching contribution, would have failed 410(b) coverage testing for the 401(k) elective deferrals and 401(m) matching contributions each year. However, the plan sponsor had been testing the 401(k) plan separately for these purposes, and had been passing each year. I believe that is not correct, and that the 403(b) plan employees should have been included as eligible employees in the 401(k) and 401(m) coverage tests, but not benefitting, which in this case would have resulted in coverage test failures. What say the Experts?”

 

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

 

The Experts say that whomever was performing the past tests was likely correct. The Experts agree with your assertion that the plans are required to be tested as plans of a single employer under the controlled group rules. But Treas. Reg. 1.410(b)-6 allows 401(k) plans to exclude a number of employees that might ordinarily be subject to the coverage testing rules, and this regulation includes this following little-known provision:

 

(g)Employees of certain governmental or tax-exempt entities –

 

(1) Plans covered. For purposes of testing either a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, an employer may treat as excludable those employees described in paragraphs (g)(2) and (3) of this section.

 

(2)Employees of governmental entities. Employees of governmental entities who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) may be treated as excludable employees if more than 95 percent of the employees of the employer who are not precluded from being eligible employees by reason of section 401(k)(4)(B)(ii) benefit under the plan for the year.

 

(3)Employees of tax-exempt entities. Employees of an organization described in section 403(b)(1)(A)(i) who are eligible to make salary reduction contributions under section 403(b) may be treated as excludable with respect to a section 401(k) plan, or a section 401(m) plan that is provided under the same general arrangement as a section 401(k) plan, if –

 

(i) No employee of an organization described in section 403(b)(1)(A)(i) is eligible to participate in such section 401(k) plan or section 401(m) plan; and

 

(ii) At least 95 percent of the employees who are neither employees of an organization described in section 403(b)(1)(A)(i) nor employees of a governmental entity who are precluded from being eligible employees under a section 401(k) plan by reason of section 401(k)(4)(B)(ii) are eligible to participate in such section 401(k) plan or section 401(m) plan.

 

Cutting through the legalese, what this provision is saying is, if none of the employees of the 501(c)(3) hospital are eligible to participate in the 401(k), and at least 95% of the employees of the for-profit physicians’ practice are eligible to participate in the 401(k) (and are eligible to receive the match for purposes of the 401(m) coverage testing), then the employees of the 501(c)(3) hospital can indeed be excluded from the 401(k) and 401(m) coverage testing of the physician’s practice.

 

It should be noted that 501(c)(3) employees may be excluded from coverage testing only for 401(k) and 401(m) purposes. If the 401(k) plan of the physicians’ practice were to offer a non-elective (base) contribution, the 501(c)(3) employees could NOT be excluded from the 410(b) coverage testing for that contribution type.

 

 

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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