Data & Research April 3, 2015

Most Americans Unaware of IRS Deferral Limits

A recent survey from Fifth Third Bank finds a vast majority of Americans cannot identify the Internal Revenue Service’s limits placed on annual tax-advantaged retirement plan deferrals.
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According to a recent survey from Fifth Third Bank, fully 90% of Americans do not know the amount of money they can defer to their 401(k) or other defined contribution plan accounts annually without triggering tax repercussions.

As the Internal Revenue Service (IRS) explains, the elective deferral/contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has increased from $17,500 in 2014 to $18,000 for the 2015 plan year. The catch-up contribution limit for employees aged 50 and over also increased $500, from $5,500 to $6,000. Effective January 1, 2015, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000.

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Despite the fact that the IRS tends to increase these limits by a small margin annually, Fifth Third Bank researchers find very few retirement savers in the U.S. are either aware of the limit or actually set their deferrals to match it. This is despite the fact that following the IRS’s annual deferral increases can give a major boost to retirement readiness and projected lifetime income levels. Even for people saving below the high water mark permitted by the IRS, enacting a $500 increase in annual savings can result in an extra $110,000 return over a 40-year time horizon.

“It’s clear that there is a gap between believing oneself to be financially savvy and having all the knowledge needed to successfully manage one’s financial life,” says Camino Smith, senior vice president of community and economic development for Fifth Third Bank. “This is especially true as it pertains to saving for the future.”

While the survey found that nearly 60% of respondents feel they are financially savvy, 44% of Americans are living paycheck to paycheck. Other key findings from the survey show less than half of Millennials know what a credit score measures, while 60% of Americans of all ages do not have enough money saved to pay bills for six months in the case of an emergency or unexpected loss of income.

Fifth Third Bank concludes that retirement savers tend to do much better in the long run when they have access to training and education from a financial adviser or some other trusted professional resource. The bank encourages plan sponsors and advisers to find ways to efficiently educate more Americans on these key financial topics. Even if they do not have the assets to make one-on-one financial advice tenable, Americans have a thirst for support when it comes to budgeting, controlling credit and creating emergency funds.

More information on the survey and Fifth Third Bank is here.

In Practice April 2, 2015

Advisers Have Much to Offer Millennials

Twenty-five percent of young women who responded to a recent Prudential survey felt they were “not in the right stage of life” to work with a professional financial adviser.
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Prudential notes the leading half of the Millennial generation, a category roughly corresponding to Americans age 25 to 34, are quickly progressing towards their prime earning years and are at the stage of their lives where they are experiencing major life milestones.

Prudential says it was not surprised its survey found many Millennials’ long-term financial planning needs are overshadowed by the need to think about more immediate events—such as getting married, buying a home or having children. In many cases, perceived costs contribute to a reluctance to engage a professional to help create a sound approach to spending and investing.

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“A common misperception is that hiring a financial professional is expensive or that you need to be wealthy to work with one,” says Caroline Feeney, president of Prudential’s national career distribution system. “But there are different types of professionals that can help you whether you’re just starting out or nearing retirement.”

Prudential says advisory firms that do more than offer pure investment advice have a lot to offer Millennials. Services Millennials say they are most interested in include help analyzing employee benefits, help developing a system to manage budgets and cash flow, and help planning for major purchases. These services can be offered for a flat dollar fee that is attractive to Millennials, but advisers have to set a reasonable scope of service that can be delivered efficiently. Advisers may even be able to turn to their service provider partners to bring call center or web-based resources to bear to efficiently support this lower-balance but promising market segment.  

Many Millennials are looking for better ways to manage and control debt, Prudential notes. Whether grappling with student loans or credit card debt, an adviser can help prioritize what Millennials pay first or how to consolidate debt to lower interest rates. Showing clients the importance of reining in discretionary spending can often go a long way towards reducing debt and boosting savings, Prudential observes.

Reducing discretionary or fixed expenses likely means establishing a budget. Although many Millennials are aware they need a budget to maximize their financial performance, Prudential says it is not uncommon for them to report a very loosely structured budget or no budget at all. 

While Millennials are increasingly turning their focus to retirement savings and leveraging employee benefits like 401(k) plans, Prudential suggests advisers can first help them establish a liquid emergency fund. Financial professionals typically recommend saving enough to cover three to six months of fixed living expenses like rent, utility bills and car payments. Helping clients create this type of immediately available backup savings substantially improves the chances they will stick to a regular retirement savings program, Prudential says. The client will be prepared if they get hit with an unexpected expense or if they lose their job, and they won’t have to turn to credit cards or loans to cover their bills.

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