November 16, 2017
What We’re Reading This Week
Starting in the 1980s we have seen a shift from defined benefit retirement plans to defined contributions plans. Put simply, a shift from pensions to 401(k)s. During that time, people have become wholly unprepared for retirement. There are other factors, like longer lives, and increasing healthcare costs that contribute to the predicament, but it all comes back to the 401(k). One of the interesting facets of financial planning is that most financial “problems” have a simple solution: more money. As a financial planner my job is to help people get more efficient so they, you know, have more money. Obviously, that’s an oversimplification but it’s also sort of true. For the past 30 years, the shift to 401(k) has mostly resulted in LESS money for people retiring, making it a problem. MarketWatch has some ideas for how to solve the problem. Specifically, they have four ideas. I don’t really like any of them.
First, they suggest we expand contribution limits. This is…problematic. If people weren’t saving enough while putting the maximum contribution into their plans, then this might be an answer. However, many people do not participate in their company’s retirement plan at all. Furthermore, the IRS has been experiencing record revenues from retirement plan distribution penalties. For those that are saving, they are treating the account like a piggy bank. Anecdotally, as a 401(k) advisor, the question I’m asked most frequently is “how do I get the money out?” Saving more than $18,000 (in 2016) isn’t the issue.
MarketWatch also suggests that we expand retirement plan availability. Unfortunately, the government already did this, it’s called an Individual Retirement Account. The government also recently offered a program called MiRA, which was essentially a government-sponsored Roth IRA. Participants in the MiRA program could invest their money in one, terrible investment. The program was recently shuttered.
Next, they propose we teach financial literacy. Of MarketWatch’s available recommendations, this is far and away the best one. They even suggest that employers initiate and provide this education. They are right, in my opinion. Especially if companies allow employees to receive this education during the work week or provide some additional incentive for completing financial and retirement education. Research abounds, there are benefits for companies stretching beyond helping their staff plan for retirement. Financial problems are among the top reasons people take time off, and many retirement plan participants report being distracted by financial issues during the day.
Finally, MarketWatch suggests we offer Traditional and Roth savings options to plan participants. This is also a thing that already exists. Yes, more should do this but many do, and it’s not stopping anyone from participating in their plan.
In the past I have written about Fidelity’s increasing retirement plan rates. Fidelity’s data shows record 401(k) deferral rates and balances. What has Fidelity done to cause this increase? They have implemented more retirement plans that automatically enroll employees, as well as automatically ratchet up savings rates on an annual basis. Essentially, they figured out that one reason pensions work
is that they were funded without requiring activity from the employee. In the end, it turns out that people aren’t avoiding saving for their retirement because they don’t know how, or because they want more access to Roth accounts. They aren’t saving because they are lazy. There are, of course, people that simply cannot afford to save for retirement, but the vast majority of people are able to save once their strategy is automated by their employer.
Wilbur Ross opposes the estate tax.
“‘It’s bad enough that you have to die,’ Ross, 79, said Tuesday in an interview on Bloomberg Television. ‘You shouldn’t be fined for doing so.’”
Sure. But this sort of flies in the face of what taxes are for. If we reduce the estate tax or eliminate it, we won’t have more people finally willing to relinquish the mortal coil. Matt Levine of Bloomberg put it best:
“This is specious reasoning. Of course we should fine people for dying! You tax — or fine — behavior that you want to discourage. Taxing a thing reduces the amount of that thing. ‘The power to tax is the power to destroy.’ If we are going to get serious about defeating death, the first thing to do is to tax it heavily. If there’s one thing that rich people love, it’s evading taxes, and if you tax death heavily enough they’ll find a way around that too.”
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