Data and Research September 26, 2017

Not-for-Profit Plan Sponsors and Participants Could Use More Lifetime Income Education

In-plan lifetime income options are offered by more than half of not-for-profit plan sponsors surveyed, but among those that don't, misconceptions exist.

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More than half (59%) of plan sponsors in the not-for-profit sector are concerned that employees will run out of money in retirement, according to a new survey by TIAA. The study also finds that the top concern among sponsors is that workers would delay retirement due to inadequate savings (64%).

These sentiments are often reflected in the private defined contribution (DC) plan sector as well, and TIAA points to several solutions that may allay these fears including in-plan retirement income options – a choice offered by more than half of the plans TIAA surveyed.

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However, the firm says those who don’t offer one share common misconceptions about annuities. Thirty-four percent say employees have better access to these investment vehicles outside the plan. Meanwhile, 21% believe the fees associated with these options are too high.

Derek Heaslip, senior managing director of institutional retirement, TIAA, says in-plan options can offer various benefits participants may not find in retail products, including lower fees.

“In-plan lifetime income options are usually group annuities so the participant typically gets better fees,” he tells PLANSPONSOR. “You can also start contributing before you retire. When you accumulate over time, you typically get better rates and the benefits of vesting and compounding, as opposed to investing in a guaranteed income option at the point of retirement.”

Ron Pressman, CEO of Institutional Financial Services at TIAA, adds: “We’ve seen that employees who contribute to an annuity through their retirement plan over time can generate more retirement income than those who simply purchase one upon retiring.”

However, research suggests that lifetime income options across the board can be very complicated for several participants to comprehend. This is why plan sponsors can benefit from a targeted, holistic approach to educating employees around key aspects of their retirement plans, including annuities as investment options.

Simple Education Needed

TIAA’s survey finds that 68% of not-for-profit sponsors believe financial education designed specifically for different age groups or life stages is effective. However, only 33% offer it.

“Plan sponsors can work with their providers to offer a comprehensive employee engagement program and identify services that may be most effective for their specific employee populations,” Pressman says.

Heaslip tells PLANSPONSOR that his firm has seen much engagement with digital tools, apps and videos that educate participants about everything from budgeting to investing in different products including annuities. He says leveraging technology and gamification has been particularly effective in getting employees to engage with their plans through digital quizzes, contests and competitive games they can play with their co-workers.

“One of the most successful games we’ve released recently is called Financial IQ,” Heaslip explains. “It’s kind of a friendly online contest that encourages and drives financial awareness through a peer-to-peer competitive setting. You test individuals’ financial IQ and that drives more awareness and engagement in the plan.”

He adds, “Roughly 70% of repeat players are women, and 29% were among Gen Y. We have a big uptake among the age 24 to 34 bracket.”

Nonetheless, human interaction is still key to any holistic educational program.

“We encourage plan sponsors to push for engagement, education and awareness through videos, digital tools and gaming as well as one-on-one advice,” Heaslip says.

Particular information about plan components like in-plan lifetime income options can also be broken down into digestible information on participant websites. “We have a lot of education and advice around what these guaranteed income products are,” Heaslip says. “What we’ve tried to do is simplify these products and explain how they work, because they can be confusing and they can have a somewhat misguided reputation. So, our tools and videos bring these products to life to help people understand what they offer and what their benefits are.”

More information about the first “Not-for-Profit Plan Sponsor Insights Survey” by TIAA can be found at tiaa.org.
Compliance September 26, 2017

NIRS Makes Suggestions for Improving the Saver’s Credit

Research from the NIRS found millions of low- to moderate-income individuals have been unable to use the credit because they lack access to a qualified retirement plan.

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In 2001, Congress created the Saver’s Credit, a tax credit available to low- and moderate-income taxpayers who contribute to a retirement savings plan.

Research from the National Institute on Retirement Security (NIRS) found millions of low- to moderate-income individuals have been unable to use the credit, because the primary requirement to file for the credit is contributions to a qualified retirement plan. Among individuals whose income makes them eligible for the credit, many lack access to retirement accounts at work and cannot save through payroll deduction.

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In addition, the research found the Saver’s Credit is woefully underutilized. From 2006 through 2014, between 3.25% and 5.33% of eligible filers claimed the credit, and the average value of the credit ranged from $156 to $174 over this time period.

The NIRS says, as currently structured, the Saver’s Credit does not adequately help the low- and moderate-income individuals it was designed to assist. It suggests a series of changes—some small and others more substantial—would enable more of the tax credit’s target population to benefit from the Saver’s Credit and build significant retirement resources.

According to the NIRS’ research paper, potential options for strengthening the Saver’s Credit include:

  • Change the tax credit to a savings match. Eligible savers would receive a match equal to 50% of the amount of retirement contributions during a tax year. The match would be claimed through tax returns and would go directly into a retirement savings account. The match would remain in the account until the saver reaches retirement age, resulting in a higher amount of retirement savings because investment earnings on the match would be added to the account. NIRS comments that the match helps members of the target population build their savings balances much faster. This will be especially true for younger savers who will see these increased amounts grow even more over time. For example, according to the research paper, a $1,000 match contributed to a retirement account at age 25 would accumulate to more than $10,000 by age 65, assuming an interest rate of 6%.
  • Simplify claiming the Saver’s Credit. Allow eligible taxpayers to claim the Saver’s Credit on the Internal Revenue Service (IRS) 1040-EZ tax form rather than just the 1040 “long-form,” similar to other popular tax credits.
  • Increase the percentage of workers eligible for the credit. By increasing the income limits, more people would be eligible for the credit.
  • Replace “cliff” income limits. Replace the three levels of credit based on exact-dollar income limits with one level that is phased out gradually.
  • Increase awareness of the Saver’s Credit. Include information about the Saver’s Credit in information to participants in new state-sponsored retirement savings plans, including their year-end statements.
  • Create state tax benefits. Encourage states to create additional tax benefits that would supplement and link to the federal Saver’s Credit similar to 529 college savings plans.

“Reforming the Saver’s Credit would help low and moderate income workers supplement Social Security benefits by increasing their retirement savings,” says David C. John, senior strategic policy adviser with AARP. “Providing a benefit to those who save encourages people to build their own retirement security, and it reduces their need for other taxpayer financed services. The relatively small cost of an improved Saver’s Credit could make a big difference in the future.”

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