Vestwell Visits D.C. to talk 401(k) and Tax Reform with Congress

Vestwell Team arriving in D.C. Left to right: Aaron Schumm, Mike Shuckerow, Peter Kennedy

As the tax reform conversation gained steam in October, some lawmakers began discussing limits on individual 401(k) deductions as a way to raise government revenues.

At Vestwell, we were concerned about this development, given that Americans are already not saving enough for retirement.

The proposed legislation would worsen the problem known as the retirement savings gap, which is the difference between a person’s income and actual expenses during retirement.

The Retirement Gap is Getting Worse, and We Want to Help Fix it

The retirement gap threatens the long-term financial security of nearly all Americans, outside of what formal lobbying committees say.

That’s why we traveled to Washington D.C.  to speak with representatives about this savings crisis.

Along with our Special SEC Adviser and Chief Compliance Officer, Mike Shuckerow, and Special ERISA Adviser, Peter Kennedy, the Vestwell team met with 22 Senators, Congressional House members and their staff within the banking, finance, and technology committees.

Our goal was to educate the representatives on the ways that we can work together to help close the retirement gap.

Americans Aren’t Saving Enough (Or At All) for Retirement

The statistics are staggering; only 8% of people in all working households have enough saved for retirement, given their ages and income.

The median retirement savings for individuals aged 25 to 64 is shockingly low at only $3,000, and a mere $12,000 for those nearing retirement aged 55 to 64.

Left to right: Aaron Schumm, Perre Smalls

Defined Contribution Plans and Accounts Can Close this Gap

We already know that 75% of Americans rely on defined benefit plans and defined contribution plans, such as 401(k)s and 403(b)s, as their only sources of invested assets.

Social security is also an elephant in the room that no one is addressing; its uncertain future places even more importance on saving and investing during one’s working years.

More Than Ever, Financial Advisors Can Help Companies Facilitate and Administer the Right Retirement Plans

During my time in D.C., I underlined the importance of 401(k) plans to address savings deficiencies.

I also talked about the key role that financial advisors, empowered by technology, play in the administration of and access to retirement plans.

This is revolutionizing the way plans are administered today, as well as providing access and opportunities for companies who previously did not offer a 401(k) or 403(b) plan to their employees. In fact, up to 90% of plans with less than $50 million AUM are managed by financial professionals.

What’s more, according to the Department of Labor & Bureau of Labor Statistics, more than 500,000 companies in America do not offer retirement plans for principals and employees.

Fortunately, with technology, financial advisors are paving the way for SMBs to help their employees and principals save for retirement.


(Top) Left to Right: Peter Kennedy, Aaron Schumm, Rep. Bill Foster, Mike Shuckerow; (Left) Meeting with Congressman Huizenga, Left to right: Aaron Schumm, Bill Huizenga, Marliss McManus

“Rothification” Threatens Long-Term Savings

Finally, we discussed the long-term pitfalls of the trend toward “Rothification,” which replaces tax-deferred 401(k) plans with accounts funded by after-tax money.

Moving tax revenue up within the 10-year budget window via a Roth-type account would end up further widening the savings shortfall across the hard working Americans that need the tax benefit most to retire securely.

Our goal was not to lobby for 401(k)s, but rather to remind lawmakers about the significant impact these proposed changes would have in further weakening American retirement readiness.

 

 (Top) Meeting at Cannon House Office Building; Left to right: Aaron Schumm, Congressman Ted Budd, Peter Kennedy, Mike Shuckerow; (Bottom) Left to Right: Aaron Schumm, Congressman Ted Budd 

Real Change Takes Partnership

Since my trip, I’ve continued to communicate with lawmakers and their staffers about these issues.

We have even invited them to meet us in our New York offices so that they can learn more about what Vestwell is doing.

Congressman Ted Budd, R-NC, took us up on the offer. The passion that Congressman Budd and his Chief of Staff showed us toward helping businesses, as well as learning more about how Vestwell services the retirement landscape, was truly invigorating.

On a personal level, I found it reassuring that our elected officials see saving for retirement as a non-partisan concern. Everyone I talked to was very willing to help others. They were ready to think deeply about the issues we raised and engage with us and others, to create solutions.

Our government is not just listening, they are acting. Vestwell is mobilizing financial advisors with technology to propel retirement savings forward, and we remain hopeful the regulators remain informed and are on a path to help.

I’m excited about the potential for change and proud of our role in it.

Wishing you all a very happy holiday season and the warmest wishes for a happy New Year!

Kind Regards,

Aaron Schumm

3 year-end must-dos for your clients’ 401(k) plans

Before the busy holiday season kicks in for you and your clients, make time to add even more value as their trusted investment advisor.

Show—don’t just tell—your clients about these three simple actions to take before year-end, which can help them: 1) reduce their tax burden, 2) increase their chances of retiring comfortably, and 3) make sure their investments remain on track.

Over the long haul, these three moves will be their holiday gifts that keep on giving, and they’ll be grateful that you checked in with them.

1. Make an extra contribution to save on taxes

Your clients have until the end of the year to make an additional contribution to their 401(k)s—which will not only boost their account balances, but also help them save on taxes for the year.

In 2017, the maximum 401(k) contribution for individuals is $18,000. You can advise them to add up their contributions to date, and then figure out how close their are to reaching that limit.

If your clients are over 50-years-old, they can make additional catch-up contributions of $6000, for a total of $24,000.

2. Increase contributions for next year

Many people take a “set it and forget it” approach to retirement savings, but it’s smart to revisit the amount deferred to retirement savings at least once a year.

Ask your clients if they received salary raises this year, and inform them that they may wish to raise their 401(k) contribution by the same percentage increase.

If a company offers an automatic escalation feature, advise them on the benefits for signing up, and their contributions will rise every year to get them closer to savings goals.

3. Check on investment performance, fees, and allocations

Advise your clients to review their investment strategies at least once a year to make sure they are on track. You can help them review all the various parts of their investments:

Performance

Show them how and where to check on performance of their investments—find out if they are happy with their investment performance relative to averages and/or benchmarks.

Fees

You should also ensure that your clients know how much they are in paying investment fees. For example, a large cap stock fund should charge no more than about 1.25% in fees; small cap funds charge a little more, averaging 1.4%.* And fees on ETFs or exchange traded funds can be even lower, around 0.53% on average.**

Help them make sure their funds aren’t eating up their returns with unnecessarily high expenses.

Allocations

You can also help your clients review their portfolios against their target asset allocations.

The stock market has done well this year, and they may have more than they expected in their stock funds. If so, help them to transfer some of the money into other asset classes to diversify and rebalance back to their target.

Helping your clients with their year-end check-up should be part of your regular annual service. Most importantly, doing so will help keep your clients’ retirement savings plans on track.

That’s one way to increase the chances that they (and you) will enjoy financially secure holidays for many years to come.

 

*Thuna, K. (2017, February 14).  Average Expense Ratios for Mutual Funds.  Retrieved from https://www.thebalance.com/average-expense-ratios-for-mutual-funds-2466612

**Why Are ETFs So Cheap? Retrieved from http://www.etf.com/etf-education-center/21012-why-are-etfs-so-cheap.html?nopaging=1

What the Nobel Prize and 401(k) Plans Have in Common

Left to their own devices, many people wouldn’t save enough (or at all) for retirement, no matter how attractive the 401(k) plan.

Statistically speaking, most Americans in their forties have saved an average of $63,000. But according to Fidelity, this may present a dangerous retirement savings gap if held to the conservative benchmark that a nest egg be three times a person’s annual salary.

Look closely, however, and you might notice participation and savings rates slowly creeping upward.

This may be due to the work of Richard Thaler, an economist and professor at the University of Chicago. He’s also the 2017 Nobel Prize winner for Economic Sciences.

Thaler is a pioneer in a field of study called behavioral economics. His research looks at the ways we, as human beings, are our own worst enemies when it comes to acting rationally and in our personal best interests. This is particularly true when it comes to saving and investing for the future.

For instance, a company may offer an employee the chance to participate in a tax-deferred retirement benefit, such as a 401(k) program. As an extra incentive to sign up and begin building financial security, the company may even offer to match the employee’s plan contributions up to a certain amount.

While you’d think that most employees would be jumping for joy and running to sign up, plan sponsors would likely tell you that this is not the case, and that getting people to participate in retirement savings programs is quite difficult, akin to pulling teeth.

Regardless of the reasons why people wouldn’t participate (Laziness? Lack of awareness or education? Misinformation?), the good news is that people can be influenced to act more rationally through mechanisms that Thaler calls “nudges.”  

Opt Out, Not In

An example of a nudge is when an employer automatically enrolls its employees into 401(k) plans from the start, and puts the onus on people to opt out rather than opt in. The results are uncanny, with a much higher number of employees saving for retirement.

This insight kicked off an industry-wide trend toward auto-enrollment. The Plan Sponsor Council of America (PSCA) found that in 2016, 58% of plans were automatically signing up workers, up from just 8.1% in 2000.

Just getting people to participate was a big step forward, but Thaler also looked for ways to influence participants to save more.

Auto-escalation locks in higher contributions   

In his paper, “Save More Tomorrow,” Thaler proposed another “nudge” to increase contributions, called auto-escalation.

Participants would start at first by allocating 3% of income to retirement. Then, with every salary raise, their investment contributions would automatically increase.

Auto-escalation has taken hold among larger plan sponsors. Callan’s 2017 Defined Contribution Trends survey found that 63% of large and mega plans offer an auto-escalation feature, up from 46% in 2015.

Thaler’s insight into why people don’t save and how to get them to do better laid the foundation for a more stable, secure retirement system—and all it took was a little nudge.  

How Tax Reform May Impact the Investment Industry

 

How Tax Reform May Impact the Investment Industry

The Senate recently passed its version of the GOP’s tax reform legislation.

The legislation isn’t final, however, as the House and the Senate must hammer out a final version of the bill that reconciles their differences.

Until that happens, you should be aware of the major changes proposed, and how they may impact your clients.

Exemptions and deductions

Under both proposals, personal exemptions would be eliminated. Both proposals would also eliminate the state and local income tax or sales tax deduction for individual taxpayers, though the standard deduction will nearly double.

The deduction for property taxes will now be capped at $10,000 (as there was no federal cap before).

While the impact on individuals will vary by situation, this could result in many investors having less cash flow to invest in their 401(k) plans and elsewhere.

No changes to 401(k) deferrals

One provision that was discussed early on in the process was limiting employee pre-tax contributions to 401(k) retirement plans.

This ultimately was not part of the package, and the IRS has increased 401(k) contribution limits to $18,500 (with $24,500 for those 50 and over) in 2018.

For those who lose the ability to itemize deductions via the changes in the tax bill, such as the increase in the standard deduction, the ability to make pre-tax retirement contributions becomes even more valuable.

It is important to remind your clients and prospects to max out their contributions if they aren’t already doing so, if this is an appropriate strategy for their situation.

For small business owners who were on the fence about starting a small business retirement plan, the ability to contribute to one for themselves might be an even better incentive under the new tax rules.

Impact on the markets

While trying to predict the direction of the stock market is always a fool’s errand at best, part of the premise of the plan is to lower corporate tax rates in an effort to spur growth.

This could well be a stimulus for the markets, but of course there are many factors that come into play here.

Be a resource

Even if you aren’t a tax expert, become knowledgeable about the features of these new rules that will impact your clients and prospects. Incorporate more knowledge into your advice to existing clients and your marketing to prospects.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.

The “Rothification” of the Investment Industry

 

 

Even before President Trump’s tax reform legislation was finalized, rumblings of limits to 401(k) contribution amounts gave credence to “Rothification” impacting the investment industry.

If such proposals had passed, this would have reduced the amount of pre-tax money that people could contribute to their 401(k) plans, while freeing up spending money for the government.

But the industry is already seeing a rise in the conversion from some or all traditional defined contribution plans to Roth-like plans, hence the movement being coined Rothification. The results have sparked a debate about the pros and cons of moving in this direction.

Pros

Proponents of the increased reliance on Roth 401(k)s and IRAs point to the tax benefits later in life for retirement savers.

These savers will sacrifice a tax break today, so that they can avoid paying taxes when the money is withdrawn from their savings in retirement.

There are also estate planning benefits, because there are no required minimum distributions (RMDs) on Roth IRAs. Roth 401(k) accounts rolled over to Roth IRAs would also receive such benefits.

Cons

Many financial advisors fear that Rothification would lead to reduced retirement savings at a time when Americans can ill-afford to do so.

The loss of the income tax deduction would cause worker’s take-home pay to be reduced.

This could, in effect, limit the cash-flow available for 401(k) contributions and other retirement savings.

Consider Taxes

Roth accounts certainly offer solid options for retirement saving. While the benefit of tax savings down the road in retirement can seem distant, the reality is that many retirees may find themselves in a higher income tax bracket in the future.

Many also see Roth accounts as a way for retirement savers to diversify their retirement accounts’ tax profiles, in efforts to be prepared no matter what tax rules are passed in the future.

In the Meantime

Financial advisors should consider how Roth accounts can make sense for 401(k) plan sponsors and their employees.

We haven’t seen the last of the Rothification movement, so it’s best to first be educated, and then be prepared for what’s next.

Vestwell does not offer tax advice, please consult your tax professional, as necessary, related to any tax-related topics.  

Building A Modern Retirement Plan Offering

What happens when technology meets retirement? The Institute for Innovation Development interviewed Vestwell’s Founder and CEO, Aaron Schumm, to find out. Learn how a modern approach can address the “three major friction points of a retirement plan.”

Click here to read more about what Vestwell does differently. 

Vestwell Announces New Advisory Board of Six Industry Leaders including Josh Brown and Lori Hardwick to Provide Strategic Counsel on Company Initiatives

NEW YORK, Nov. 9, 2017 /PRNewswire/ — Vestwell announced today the creation of a new advisory board to provide guidance and advice as the firm experiences significant growth. As of today, the board includes six prestigious industry leaders.

Vestwell’s new advisory board will meet with the firm’s leadership team to provide strategic counsel. Discussions will revolve around best practices, innovative ideas, and sharing feedback on the growing company’s trajectory. The newly appointed Advisory Board members include:

  • Josh Brown, CEO of Ritholtz Wealth Management
  • Lori Hardwick, Founder & President at AI Labs, former Co-Founder & Group President at Envestnet, Inc. and Chief Operating Officer of BNY Mellon’s Pershing
  • Aaron Schildkrout, Global Head of Growth & Driver Product at Uber
  • Lowell Putnam, Co-Founder and CEO of Quovo
  • Jamie Bernardin, Former CTO at Integral Ad Science & Founder/President of DataSynapse (acquired by TIBCO Software)
  • Peter Kennedy, Former Chief Operating Officer TIAA Individual & Institutional Services, LLC. and former Chief Administrative Officer for the Managed Account Business at UBS Financial

Josh Brown, CEO of Ritholtz Wealth Management, is a renowned industry thought leader known for sharing market and industry insights on his blog, The Reformed Broker. “I am thrilled to be selected as an inaugural member of Vestwell’s new Advisory Board,” said Brown. “I’m excited to use my experience as a financial advisor to shed light on industry issues to help propel Vestwell’s effort of providing advisors with best-in-class retirement planning technology to the next level.”

Lori Hardwick, is an entrepreneur at heart, having been a co-Founder of Envestnet as Group President of Advisor Services, and most recently co-founding Advisor Innovation Labs. She has deep working knowledge of what drives advisors and how they can best service their clients. Her proven ability to grow, shape and lead a team in the FinTech & FinServ space is highly-valued. As it pertains to Vestwell, Ms. Hardwick states, “The company’s retirement technology solutions are changing the way advisors interact with their clients. I’m looking forward to providing counsel to the board on how to service advisors on all sides of the table, from technology to customer service perspectives.”

“In just about a year since launching, Vestwell has attracted thousands of financial advisors looking to offer low-cost retirement plan options on a platform that assumes fiduciary responsibility,” said Aaron Schumm, Vestwell founder and CEO. “We are thrilled to announce our new Advisory Board, which will continue to push us to innovate more, allowing us to create efficient and customized solutions for financial advisors – ensuring that plan sponsors have access to high quality, low-cost retirement plan options. It’s a true pleasure to be surrounded by such experts and thought leaders in the industry, as we take Vestwell to new heights.”

About Vestwell Holdings, Inc.
Vestwell Advisors, LLC is a SEC registered investment advisor, a wholly owned subsidiary of Vestwell Holdings, Inc., specializing in 401(k), 403(b) and other defined contribution and benefit retirement investment management services. Built by an experienced team led by CEO Aaron Schumm, Vestwell assumes 3(38) investment management and ERISA3(16) fiduciary responsibility on the behalf of advisors and their plan sponsor clients. Learn more at Vestwell.com and on Twitter @Vestwell.

This is not an offer, solicitation, or advice to buy or sell securities in jurisdictions where Vestwell Advisors is not registered. An investor should consider investment objectives, risks and expenses before investing. More information is available within Vestwell Advisors’ ADV. There are risks involved with investing. Investors should consider all of their assets, income and investments. Portfolios are subject to change. All opinions and results included in this publication constitute Vestwell Advisors’ judgment as of the date of this publication and are subject to change without notice.

SOURCE Vestwell Holdings, Inc.

Related Links

http://www.vestwell.com

 

This Tax Benefit Can Get Your Client Over the Fence About Starting a Retirement Plan

It’s time to discuss whether your small business owner should start offering a retirement plan.*

You might be able to garner more interest on the topic by showing what tax benefits are included.

The tax credit, a dollar-for-dollar reduction of the company’s income taxes, might just be enough to get your client over the fence.

Credit for Small Employer Pension Plan Startup Costs

If certain conditions are met, your client can claim a deduction for the start-up costs of a new retirement plan, of up to $500 per year for the first three years of the plan, for a maximum of $1,500.

The plan must be a qualified retirement plan, SEP-IRA, or SIMPLE.

Is Your Employer Eligible?

According to IRS rules, eligible employers must:

  • Have fewer than 100 employees who received at least $5,000 in compensation for the past year
  • Have at least one non-highly compensated employee in the plan
  • Not have contributions or accrued benefits from another qualified retirement plan from the same company or as part of a control group, for this same group of employees, for the prior three years before this plan was put in place

The Tax Credit

The amount of the credit is 50% of the normal start-up costs for the plan each year, up to a limit of $500.

Eligible start-up costs include:

  • Costs to establish the plan
  • Cost to educate your employees about the plan

The credit may be claimed for each of the first three years of the plan, and businesses may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

It is also part of the general business credit and may be carried backwards or forward if it can’t be used in the current tax year.

There is no “double dipping,” i.e., the same costs used for the credit cannot then be deducted as a business expense.

Retirement plans offer a number of benefits for business owner and their employees.

Mention the $1,500 tax credit benefit to your small business clients, and you might be able to get them over the fence about offering a retirement plan to their employees.

 

The opinions expressed in this article are those of the author, and do not constitute any service or obligation of Vestwell Holdings, Inc or its affiliates.

*Vestwell and its affiliates do not offer tax advice