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A private letter ruling released on Friday by the US Internal Revenue Service gave the tax authority’s blessing to a benefit program in which an company offers to make contributions to its employees’ 401(k) retirement savings if they put a certain percentage of their salaries toward paying down their student debt. The letter finds that this scheme does not violate the regulatory prohibition on making other benefits contingent on an employee’s participation or non-participation in a 401(k) plan.
The letter explicitly notes that its ruling applies only to this one employer, and written determinations such as this letter cannot be used as precedent under federal law. Nonetheless, one expert tells Employee Benefit News that this could pave the way for more employers to offer similar matching programs for student loan payments:
Historically, many plan sponsors have questioned whether such an approach would be permissible under IRS rules. But, explains Jeffrey Holdvogt, an employee benefits partner with McDermott Will & Emery in Chicago, the ruling confirmed that— under certain circumstances — “employers may be able to link the amount of employer contributions made on an employee’s behalf under a 401(k) plan to the amount of student loan repayments made by the employee outside the plan.” …
“[The letter] provides helpful guidance for employers looking for new ways to provide such benefits and, in particular, for employers looking for ways to accomplish the dual purpose of helping employees manage student loan repayment obligations while saving for retirement,” Holdvogt says.
The organization in question is not identified in the published letter, but the matching program it describes appears identical to the one the pharmaceutical company Abbott Laboratories rolled out in late June. In Abbott’s Freedom 2 Save program, if employees contribute at least 2 percent of their salary toward their student loans in a year, the company will contribute the equivalent of 5 percent of their salary to their 401(k) plan at the end of that year.
Financial wellbeing programs that help employees better manage their finances, pay down debt, and plan for retirement have become commonplace among private US employers. Employees want this kind of help and employers are increasingly eager to offer it. Bank of America Merrill Lynch’s 2018 Workplace Benefits Report, however, finds that only one third of employees are actually participating in these programs, even though many more are struggling with financial fitness, Nick Otto reports at Employee Benefit News. One potential explanation for this low level of engagement is that the financial wellness benefits employers are offering are misaligned with employees’ own priorities:
Employers tend to focus on actions to manage immediate financial needs, such as budgeting and handling expenses, according to the study. Meanwhile, employees mostly prioritize long-term financial goals, such as tactics that help them save and invest for the future. The report finds workers are looking to their employers to help manage their financial lives, shining a light on what employees seek in an employer-sponsored financial wellness program.
Employees feel the best approach to improve financial wellness is getting a personal financial assessment, supported by specific actions to take. Additionally, employees would also like help measuring their progress, through tracking and measuring of accomplishments.
Another notable finding from the report is that few employees recognize the role of health care costs in their financial planning: 7 percent identified health care as a key component of financial wellness, even though more than half said they had skipped or postponed a medical need to save money. The connection between health care costs and financial wellbeing is particularly salient in the US; for instance, many experts have promoted the use of health savings accounts as long-term savings and investment vehicles, comparable to 401(k) plans for retirement.
Over the past few years, a growing number of US states and cities have enacted legislation to create state-sponsored retirement savings programs for employees of organizations that don’t offer an employer-sponsored plan like a 401(k). Currently, 40 states have considered, studied, or moved toward implementing this type of program, though only 10 states and one major city (Seattle) have yet implemented them, writes Paula Aven Gladych at Employee Benefit News. Not all state and local policies are alike, however: While automatic-enrollment, payroll-deducting IRA programs (“auto-IRAs”) are the most popular policy tool, others include multiple-employer plans and retirement savings marketplaces:
California, Connecticut, Illinois, Maryland, Oregon and the city of Seattle have adopted automatic IRAs. Massachusetts and Vermont have adopted multiple employer plans and New Jersey and Washington State have adopted marketplaces. New York, the latest state to jump into the fray, has adopted a voluntary payroll deduction IRA. …
The states that haven’t made a move yet will be watching closely to see how effective the different tools are in marketing the plans to employers and employees. … These programs are getting bipartisan support. Blue and red states are studying the issue. Every year there’s a handful of states in study mode, considering what their options are, says [Angela Antonelli, executive director for the Center for Retirement Initiatives at Georgetown University].
New York’s new program, adopted in April as part of the state’s budget for fiscal year 2019, is similar to the auto-IRAs adopted in other states, except that it is not compulsory for any employer to participate, as Paychex analyst Jessica Curtin explained at the time. The program, scheduled to begin in April 2020, uses a Roth IRA structure, so contributions are made on a post-tax basis. Employers cannot make direct contributions to the plan, but those that choose to participate must automatically enroll their employees at a contribution rate of 3 percent of their paychecks; employees may then choose to opt out.
Prudential’s 10th annual Benefits and Beyond: Employer Perspectives on Financial Wellness survey finds that the number of US employers offering financial wellbeing benefits has grown exponentially in the past two years. This year’s study, data for which was collected in September-October 2017, finds that 83 percent of employers are offering these programs, compared to just 20 percent in the last study, conducted in June-July 2015.
In fact, Prudential’s data show that more employers offer this benefit today than the combined total of those who said they already offered it, planned to offer it, and would like to offer it in 2015. An additional 14 percent say they plan to offer financial wellbeing benefits in the next one to two years, indicating that these programs will soon be nearly universal among US employers.
Employers are also offering a wider variety of financial wellbeing programs, Prudential found: seven, on average. The most common of these include digital portals, tools and calculators to help employees measure their financial health, retirement planning assistance, and access to financial advice or advisors—though recent data from the Bureau of Labor Statistics show that only about 20 percent of US employees have access to financial advising services through their employer. Employers told Prudential that they were measuring the success of these initiatives along several metrics, including employee satisfaction, retirement plan participation, productivity gains, and ROI.
The Fifth Circuit Court of Appeals issued a ruling on Thursday vacating the controversial “fiduciary rule” enacted by the Labor Department during the Obama administration, which would have required financial advisors to act in their clients’ best interests when advising them about retirement. The ruling overturned a February 2017 district court decision upholding the regulation, with a three-judge panel ruling 2–1 that its implementation had violated the Administrative Procedure Act. Politico’s Morning Shift newsletter called Thursday’s decision “a victory for the financial services industry,” whereas labor activists were dismayed:
A range of business associations — including the U.S. Chamber of Commerce, a plaintiff in the case — said in a joint statement that the court “ruled on the side of America’s retirement savers.” The groups have thrown their weight behind an effort by the Securities and Exchange Commission to draft a separate standard for advisers, which they say should “not limit choice for investors.” On the other hand, Christine Owens, executive director of the National Employment Law Project, said the ruling “threatens the Labor Department’s very ability to protect retirement investors now and in the future” — and encouraged an appeal.
Thursday’s decision was handed down just two days after another federal court, the Tenth Circuit, issued a ruling in a separate case concerning the treatment of fixed indexed annuities under the rule. That court found that the Labor Department had satisfied its obligations under the Administrative Procedure Act in amending the rule to make sales of such annuities ineligible for Prohibited Transaction Exemption 84-24 (Proskauer attorneys outline the particulars of the ruling in more detail at JD Supra).
In agreeing with the department’s decision to amend one facet of the fiduciary rule, the Tenth Circuit’s ruling could be interpreted to implicitly uphold the regulation as a whole, although that was not at issue in the case. Yet another fiduciary rule case is still pending in federal court as well, so industry experts are advising retirement plan sponsors to remain compliant with the rule for the time being, Paula Aven Gladych notes at Employee Benefit News:
Earlier this month, Delta Air Lines announced that it was paying out over $1.1 billion in profit sharing to its more than 80,000 employees, which Fortune reported was the second-largest payout in its history after the $1.5 billion it shared last year. Over the past five years, Delta said it had paid out nearly $5 billion through its profit sharing program, which returns 20 percent of its annual pre-tax profits to the employees if they exceed $2.5 billion and 10 percent if not.
Profit sharing has become an increasingly common feature of progressive employers in recent years, in sectors from manufacturing to tech and show business. Advocates have touted it as a potential remedy to the problem of wage stagnation at a time when many corporations are posting record profits.
The good news for Delta’s employees was somewhat less welcome to its competitors, however. At American Airlines, which introduced profit sharing in 2016 at a rate of 5 percent, and whose profits for 2017 were smaller than Delta’s, employees are “concerned because their profit sharing rate is less than at either Delta or United,” Ted Reed observed at Forbes:
A Delta captain will get a payout of $29,000 to $59,000, according to the Allied Pilots Association, which represents 15,000 American pilots, while a United captain gets between $9,300 and $20,500 and an American captain gets $3,600 to $7,500. … The union wants to discuss higher profit sharing with management, APA spokesman Dennis Tajer said Wednesday.
2017 was a good year for the stock market in the US, with the S&P 500 index rising 22 percent and the Dow Jones industrial average up 25 percent. This bull market has led to a spike in the value of Americans’ retirement savings accounts, which sounds like good news for the retirement readiness of the US workforce. However, Todd C. Frankel and Thomas Heath point out at the Washington Post, these huge gains are inspiring many working Americans to dip into their 401(k)s and IRAs at a hefty penalty to fund big-ticket purchases:
“I’ve seen more money requests for extraneous items in the last six weeks than I have in the last five years,” said Jamie Cox of Richmond-based Harris Financial Group, which manages $500 million in savings for about 800 middle-class families. … Cox said he is seeing more people take larger withdrawals, $20,000 to $40,000, to fund dream vacations or home improvement. …
The average annual return for 401(k)s hit 15.7 percent by the third quarter of 2017, according to Fidelity. And for most Americans, it’s these retirement accounts — 401(k), 403(b), SEP and IRA — that provide the closest evidence of a revving stock market. Retirement assets — including annuity reserves, pensions, and defined contribution plans such as 401(k)s and IRAs — exploded in the United States from $11.6 trillion in 2000 to $27.2 trillion as of Sept. 30, 2017, according to the Investment Company Institute, which represents the mutual fund industry.
In some cases, the early withdrawals financial planners are seeing reflect an irrational belief that the good times will roll on long enough for their retirement accounts to make back the money they are taking out. For others, however—especially workers approaching retirement age—the impulse to cash out comes from a fear that the stock market is overvalued and a crash is on the horizon that will wipe out their savings if they don’t get out in time.