Half Say They Would Save Less If Retirement Tax Incentives Were Reduced

According to the Wells Fargo/Gallup Investor and Retirement Optimism Index, asset owners are feeling about as optimistic today as they did back in September 2000, when the index set its as-yet-unbroken record high of +147.

The strong optimism for the third quarter stands despite real concern, only recently abated, that Congressional tax reform efforts might reduce or even eliminate tax incentives and favorable deferral rules for employer-sponsored retirement plans. According to the index results, three-quarters of non-retired investors in the survey have a 401(k) plan, and more than half (57%) say the most valued feature of their plan is the “match contribution from their employer.” The next most valued feature is the tax deferral on the money they contribute, which was noted by 33% of respondents.

“The 401(k) plan has evolved into the greatest savings and investment vehicle that Americans have today to steadily build a retirement nest egg,” says Fredrik Axsater, executive vice president and head of strategic business segments at Wells Fargo Asset Management. “Pre-tax savings has a direct impact on the level of savings that people achieve, and we have to recognize this as the country contemplates changes in tax policy.”

Forty-six percent say they would “save less” or “stop saving” in their 401(k) if the tax deferred status of their plan was taken away.

Confusion abounds over retirement income

One key finding from the index shows nearly all non-retired investors (98%) “strongly agree” or “somewhat agree” that “it is important to have a guaranteed income stream in retirement, in addition to Social Security,” and yet, according to Axsater, there is confusion about how to get this additional income stream.

“Six in 10 either strongly agree or somewhat agree that they want a guaranteed monthly income stream that lasts as long as they need it, even if that means giving up access to some of their money,” he says. “But at the same time, 75% of non-retired investors either strongly agree or somewhat agree that they want the freedom to spend their money as they want in retirement, even if that means they may run out of money too soon.”

Investors also are unsure about what products are available to provide them with a guaranteed income throughout retirement. In addition, they are unsure how much money they would need to structure various levels of income for various amounts of time.

“Setting a retirement savings goal—even if it’s an estimate—is a critical step in the process of managing one’s retirement outcome, but it’s hard to do,” Axsater notes. “Further, it becomes even harder to try to estimate what one will harvest from savings each year of living in retirement. This is where our industry must come up with solutions that allow people to envision their savings needs and what that translates to in terms of annual draw down in retirement.”

Interest grows in social impact investing

Wells Fargo and Gallup researchers asked investors about their views on “social impact investing,” which was defined for respondents as “choosing investments based on the effect they have on things like the environment, human rights, diversity and other social values, in addition to investment returns.”

Women express more interest in investing in social impact investments, with 39% saying they are “very interested” or “somewhat interested,” as compared with 26% of male investors. The data shows younger investors appear more interested in this type of investing, with 39% of investors aged 18 to 49, “very interested” or “somewhat interested,” compared with 29% of investors age 50 and older.

Overall, 44% of non-retired investors with a 401(k) say they would “definitely” or “probably” put money in social impact investments if they had the option in their plan. Moreover, 34% of non-retired investors with a 401(k) say that including social impact investments as an option in a work-place retirement plan would make them feel “more positively” toward their employer. Of those non-retired investors who would feel more favorably about their employer, 53% are women and 47% are men.

In the Wells Fargo/Gallup survey, investors were asked to rate their interest in each of three specific social impact themes. Seventy-eight percent of investors say they are “very interested” or “somewhat interested” in protecting the environment, 76% are “very interested” or “somewhat interested” in doing social good—such as promoting diversity and improving education—and 74% are “very interested” or “somewhat interested” in focusing on responsible corporate governance, including “ethics” and “behaviors.”