In Practice September 11, 2023

Adviser Opportunities in Serving the K-12 Education Market

Jim Kiley of Security Benefit outlines the multiple opportunities available to retirement plan advisers with school district employees.

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There are more than 6 million employees in school districts across the country, presenting a broad opportunity to help these professionals, and their significant others, with their retirement planning needs.

According to the National Tax-Savings Association, only about one-third of educators have started a supplemental retirement plan such as a 403(b)/457 in their respective school district. This gap presents a tremendous need for financial education and coaching, as their once fail-proof retirement, based on state-provided defined benefit plans (pensions), are being changed dramatically or terminated altogether in many states. School districts are doing their part to help their employees, but there is room for additional guidance and assistance.

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By way of background, a 403(b) is similar to a 401(k) plan, except a 403(b) plan is designated for public school districts, higher education institutions and nonprofit organizations. A 403(b) plan offers a variety of advantages, including pre-tax or Roth contributions, tax-deferred accumulation, catch-up contributions and employer matching, that can help teachers and administrators down the road to retirement. 

Educators, now more than ever, should be working with a financial representative to create and execute a retirement plan that can last several decades in retirement and ensure their financial future. Financial service representatives focused on the K-12 education market have found a renewed urgency to help educational professionals with their retirement planning needs, given current economic challenges like higher interest rates and inflation. 

Educator Market Retirement Challenges 

Jim Kiley

Retirement readiness for today’s educators has become a challenge. Educators have long relied on pensions as a safety net and the primary source of income in retirement. However, with higher life expectancies, market volatility and other demographic factors, these defined benefit pension plans are now facing cutbacks and, in some states, termination. K-12 employees will need to supplement their reduced state pension and Social Security payouts with voluntary retirement savings through payroll deduction 403(b)/457 plans to cover the savings and retirement income gaps. 

Early in their careers, education professionals have many competing financial priorities, but they also have the greatest ability to grow assets over time, thanks to the power of compounding. Younger educators and school workers should strive to save as much as possible while still meeting their financial obligations, but all financial situations are personal and dependent on factors like paying higher-interest debts, such as student debt, first.

By mid-career, educators are hopefully well on the path to retirement, with an understanding of what the future holds in the way of pension income, potential health-care costs in retirement and the effects of inflation on the value of the dollar. Mid-career professionals should focus on preserving retirement assets. They should also look to increase their savings rates along with their salary growth, maximizing their opportunities during these critical years.

Late-career educators have many important decisions to make. When to retire? When to begin taking pension payments? What distribution option or how much to contribute? Financial professionals can assist by offering up solutions that focus on generating retirement income educators can use, as well as smart planning to retire on their terms. Financial professionals can also help make the most of state-provided plans and additional income sources.

Another challenge facing school employees is that, unlike the private sector, Social Security isn’t a given. When the program was first created in 1935, it was not available to public sector workers. States were eventually given the responsibility to decide if public employees would be able to participate, and not all can. This limits those workers’ retirement income sources to their pension and 403(b) account. By running a simulation for a teacher’s retirement income, a financial professional can provide critical insights into what retirement could look like and, if an income gap is found, suggest solutions to close it up. 

Business Building Opportunity 

A financial services career focused on the education markets can offer the following advantages: 

  • Access to 500-1,000 or more potential prospects per school district;
  • Accumulation of a significant client base quicker than most traditional methods; and
  • Ability to build a practice through financial planning with clients over time. 

Other opportunities will often present themselves as you seek to serve a household’s retirement needs. A teacher’s spouse may need guidance of their own, such as setting up a savings plan via a SEP, Simple IRA or Solo K, or they may be looking to consolidate their various 401(k)s into an IRA and more.

To cite an example from my past: I was working with the superintendent of a school district and helped him set up his 403(b) plan with monthly investments. He introduced me to his wife, who had just sold her law practice. She did not have a retirement plan in place. I worked with her to set up a non-qualified annuity account with a sizable investment balance.

Many initial 403(b) clients led to a much bigger household opportunity and a long-lasting relationship that helped support the couple’s retirement  and ancillary investment goals. 

Conclusion 

Serving our nation’s educators and their school district colleagues can be a rewarding career. These professionals are facing challenges relating to their pensions, the lack of Social Security, paying off student loans and more, and they need help to establish a viable retirement plan. The K-12 marketplace offers the rich potential of a diverse market full of additional opportunities, including household relationships. 

K-12 employees will need to supplement their reduced state pension and Social Security payouts with voluntary retirement savings through payroll deduction into 403(b)/457 plans to cover the savings and retirement income gaps.

Retirement plan providers offer resources, including educational materials, comprehensive tools and a range of products and strategies that can help meet different retirement needs.

Jim Kiley is head of Eastern sales at Security Benefit. 

In Practice September 8, 2023

7 Questions Advisers Can Ask Plan Sponsors in Q4

Vestwell’s director of plan design consulting shares a playbook of options advisers can discuss in year-end plan meetings with longtime, new or potential clients.

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September 8, the day PLANADVISER interviewed Vestwell Director of Plan Design and Consulting Kevin Gaston, was also what is known as 401(k) Day, the Friday after Labor Day.

But when speaking with Gaston, about retirement coverage broadly and the minutiae of 401(k) policy changes, one gets the sense that every day is 401(k) Day for him.

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Between the SECURE 2.0 Act of 2022 and state mandates, Gaston is not alone, at least among policymakers, when it comes to focusing on defined contribution retirement plans. That’s partly why he sees this as a fruitful moment for plan advisers.

“The best thing about the SECURE credits and 2.0 rule changes are that, if you’re in the industry and you’ve been looking for a shot in the arm, this is a new fresh set of things to talk about,” he says. “That moment where you get to walk into a business owner’s office and set up a plan, you have a trusted new client, and you are their trusted adviser.”

Here are seven question Gaston recommends plan advisers ask clients as they near the final quarter of the year.

Question 1: Are you ready to move from a Savings Incentive Match Plan for Employees IRA into 401(k) plan?

Starting in 2024, plan sponsors can convert a SIMPLE IRA—a government workplace retirement plan designed for small businesses—into a safe harbor defined contribution plan during the plan year without any tax hit.

“A SIMPLE IRA is a great product. There’s nothing wrong with it. It actually fills a need very easily,” Gaston says. “But here’s where advisers would want to look at it. … SIMPLEs have some very basic limits to what they can do and a lot of the complex plan design that a business owner might want to think about.”

Those caps include only being available to companies with fewer than 100 employees and employee salary deferrals being capped at $15,500 if less than 50 years old, at $19,000 if older. Under SECURE 2.0, the switch can also be made to a safe harbor 401(k) or 403(b) plan in the current plan year, as opposed to waiting for the year to change over.

“This gives advisers another option to say ‘Hey, this is the year you’re doing well, and if you want to do more, let’s talk right now. Let’s get this going,’” Gaston says.

Kevin Gaston

Question 2: Are you looking for a way to build up Roth savings?

Employer matches and catch-ups may not be deposited into a Roth account, which the plan sponsor may also be able to take as a business deduction.

Gaston notes that—positively, in his view—the mandatory Roth catch-up contribution for higher-income earners was delayed two years by the IRS. That said, employers can still choose to offer their match or catch-up offering as a Roth offering with taxes paid up front.

Overall, however, recordkeepers, payroll providers and plan sponsors themselves are either not ready for that switch or likely have questions about how to handle it, Gaston says. For instance, an employer contribution would have to be fully vested to be taxed when going into the savings.

“If you’re thinking about employer contributions going to your match, or nonelective as a Roth basis, have that conversation about the complexity that is involved and is that right for your business?” he says, noting that smaller businesses may be more apt to take it on than those with 500 or more employees.

Question 3: Have you taken advantage of employer contribution credits?

Even if a plan sponsor did not make an employer contribution to the plan in 2023, it can make one after the plan year and still deduct it from 2023 taxes.

“If you are a 20-person business and you’re just getting started, you may not have an adviser,” Gaston says. “The biggest thing for advisers is to be able to explain the rules [around employer credits for starting plans] and … [then] partner up twith bookkeepers and CPAs who not only can help you find businesses that don’t have plans that didn’t know any of this, but can get you in the door with a voice of reason and authority.”

Question 4: Are you familiar with the attribution rule changes?

SECURE 2.0 changed some business ownership attribution rules. Business owners may be able to treat plans with common ownership as spin-off plans.

Before SECURE 2.0, in some states, if spouses had separate businesses, each spouse would be considered to own the other spouse’s business, making any changes or spin-offs complicated when it came to retirement plan benefits. Starting in 2024, state community property laws can be disregarded, and spouses can claim rights to their own businesses separate of their partner.

“It was a little unfair that you could have two different 401(k)s for a husband and wife and then move to a different state and need to combine them,” Gaston says. “It was a pain point that isn’t there anymore that advisers can discuss.”

Question 5: Did you have a great year as a company and want to increase company contributions?

Clients can make contributions to the plan up until the date in 2024 they file their 2023 tax returns.

Under prior rules, plan sponsors could only increase company contributions up until the end of the current year. Now sponsors have until the following tax season to make an additional contribution. That will help, Gaston says, an adviser’s “year in review” meetings, because clients are no longer “handcuffed” by not being able to take action if, by January or February, they determine they had a good full 2023 and want to add contributions.

“It’s a small rule, but it makes a big difference for the right person,” he says.

Question 6: Are you a sole proprietor looking to set up a plan for last year?

If so, for the first year only, clients can start a 2023 plan in 2024 and defer salary, even after the year has ended.

This rule takes some of the friction out of a single business owner setting up a retirement plan benefit if they have had a “breakout” year and are ready to start a 401(k) plan, Gaston says.

“It just gives more ability to get that first year up and running,” he says.

Question 7: Do you have highly compensated employees making catch-up contributions or did your plan fail ADP testing that triggers you to make catch-up contributions?

 After the IRS decision to delay the mandatory catch-up contribution for high-income earnings, this catch-up does not need to be treated as a Roth until 2026. But even with the longer timeline, advisers should be aware of the possible tax consequences of having employees pay taxes up front before contributing.

Gaston says this rule, while delayed, will still create fruitful conversations for plan advisers with their clients.

“To me, a lot of these rules are decreasing the friction point of starting a plan,” he says. “Let’s make small businesses and participants have the 401(k) be as useful as possible.”

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