Data & Research October 26, 2017

EBRI Breaks Down Number Affected by Tax Reform Changes

An Employee Benefit Research Institute analysis breaks down the number of 401(k) contributors who would be affected by a mandatory, partial Rothification proposal in tax reform.
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As interest in potential corporate and individual tax cuts continues to grow, retirement plan sponsors worry this may lead to legislation requiring employee contributions in workplace retirement plans to be made after-tax, in order to counterbalance tax cuts—a mandate that in turn, could impact plan participation and participant deferral rates.

The Employee Benefit Research Institute (EBRI) has released its most current information as to probable effects of the Rothification proposals now under debate. 

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According to the release, some tax reform packages might include a “mandatory, partial Rothification” rule, whereby 401(k) employee contributions up to $2,400 annually can be made either pre-tax or Roth—after-tax—depending on plan design and employee choice; those over $2,400 would  be treated on a Roth basis. Employee contributions made pre-tax, as well as ensuing investment returns, would, as now, be taxable on subsequent distribution, and employee contributions made on a Roth basis, including their investment returns, would not.

Using its numbers from year-end 2015—i.e., its latest, from the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project—EBRI breaks down the percentages of 401(k) contributors, and their contributions, that the $2,400 threshold would affect, subjecting the contributions to tax.

For those at the lowest wage level—$10,000 through $24,999—38% would be affected. Of those making $25,000 through $49,999, slightly fewer, 32%, would be affected, whereas in the $50,000 and up ranges, sharp increases would occur. The affected group grows to 60% for workers making $50,000 through $74,999 and to 76% for the $75,000 through $99,999 wage group. Eighty-seven percent of 401(k) contributors who make over $100,000 would be affected.

As to percentages of 2015  401(k) plan contributions,  58% made by those earning $10,000 through $24,999 exceeded $2,400 and would have been subject to Rothfication—and tax. The percentage drops to 51% for the $25,000 through $49,000 earners, then increases to 58% for those in the $50,000 through $74,999 income range. Additionally, 70% of contributions for those making $75,000 through $99,999 a year and 80% for those making $100,000 or more would be affected.

EBRI further broke down, by age, how many 401(k) contributors would surpass the threshold: Forty-three percent of the youngest group—ages 25 through 34—56% of those 35 through 44, 62% of those 45 through 54, and 64% of those 55 through 64.

Slicing its data by both age and amount saved, EBRI found 53% of contributions made by the youngest employees—i.e., 25 through 34 years old—would exceed $2,400 and be “Rothified.” This number increases to 66% for employees ages 35 through 44, to 72% for those 45 through 54, and 75% for those 55 through 64.

The EBRI expects to release its complete study—conducted through the EBRI Retirement Security Projection Model—on how possible tax reform changes will affect retirement income adequacy, in an EBRI policy forum during early or mid-November. More information about this study can be found here.
Data & Research October 26, 2017

MassMutual Study Says African-Americans Want More Financial Education

Forty-five percent of African-Americans who bring home $75,000 or more say they feel less than financially secure compared with just 28% of other Americans in the same income category.
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“Across the board, African-Americans are more likely to say they are unprepared for retirement and feel less financially secure, but [they] are more open to education and financial guidance,” says Evan Taylor, head of MassMutual’s African American Markets.

His observations derive from a study by MassMutual that surveyed 492 African-Americans with an annual household income between $35,000 and $150,000. Forty-five percent of African-Americans who bring home $75,000 or more say they feel less than financially secure compared with just 28% of other Americans in the same income category.

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African-Americans are more likely to say they are behind in saving for retirement, and 41% of  survey respondents expressed concerns about making ends meet. Respondents also indicated a greater proclivity to making withdrawals or loans from their 401(k) or other employer-sponsored retirement plan compared with the general population—24% vs. 14%, respectively.

Middle-income African-Americans are more likely to report difficulty managing their household’s monthly finances than do others, the study notes. Thirty-six percent said they found managing finances “somewhat” or “very difficult” compared with 27% of the general population. Nearly half of African Americans with an annual household income below $45,000 find it “much more difficult” to manage their finances.

According to the study, the top financial issues African-Americans face are:

·       Debt – 28%;

·       Lack of income – 23%; and

·       Cost of living – 18%.

All of these numbers exceed what the general population reports. Meanwhile, African-Americans were nearly half as likely to worry about the cost of health care as others, the study finds.

While African-Americans are more apt to say they lack the knowledge or wherewithal to manage their money, they express a high level of interest in receiving more education and information about financial planning and money management. In addition, they are slightly more likely than others to agree that financial services companies want to help households such as theirs. However, significantly less of them work with some type of financial professional than do those in the general population—29% vs. 38%, respectively; 48%—almost half—say they are unsure where to go for financial advice.

Many middle-income African-Americans have a low level of savings, with three in 10 reporting smaller than a $500 emergency fund compared with two in 10 respondents in the general population. Most feel they could manage a sudden expense of $500, but those who couldn’t are more likely to use a payday loan—i.e., a small, short-term unsecured loan—than others, the study finds. More than half—55%—say an unexpected expense of $5,000 would cause them significant discomfort, or they wouldn’t be able to get by. Forty-five percent of the general population respondents report the same.

“The findings demonstrate a real need to reach more people, make financial education and guidance more readily available, and focus on financial wellness,“ Taylor says.

More findings are here.

 

 

 

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