Rethinking Savings Goals

Alison Cooke Mintzer (photo by Chris Ramirez)

As fourth quarter meetings happen at the beginning of the new year, this is a good time to reflect on how retirement plans closed out the previous 12 months and to consider what could or should be changed going forward. I imagine many of your clients are looking at their plan returns and feeling pretty positive about the end-of-year account balances their participants are seeing.

Over the week between the holidays, I heard about one area in particular that might be worth addressing in 2018. In speaking with a friend—let’s call her Susan—she shared with me that she had set a financial goal last year only to have it thwarted by an outside force. What was her 2017 resolution? To max out her retirement plan, meaning she would save the greatest amount permitted under the Internal Revenue Service (IRS) limit—$18,000 last year, $18,500 this year. I was impressed: How many people actually do this?

However, she said, while she had dutifully done her budgeting to ensure her payroll deferral rates would meet that maximum, she ended up being told that it was likely the plan would fail its discrimination testing and, therefore, money would be returned to her. This was frustrating to her for multiple reasons. First, she said, she thought it wasn’t fair: She had done her part to budget and put the money into the plan, and not once had she been told that she might be unable to defer as much as the IRS allowed.

Second, she also was upset because having that money rejected went against all of the other information she had received from her employer and plan provider. After all, she thought she was supposed to be saving between 10% and 15% annually. She is a highly compensated employee (HCE), making approximately $130,000 a year, so a 10% to 15% annual savings rate would mean deferring between $13,000 and $19,500—the higher amount not even an option under the IRS limits.

In our conversation, I realized Susan was making a good point about the retirement plan system, a point we don’t always consider. We often fixate on the majority of people not saving to the match maximum or at least to that 10% goal. But for those who do save 10%, is it enough? Certain studies seem to bear this lapse in the system out, saying Social Security will make up a large percentage of lower-income employees’ replacement income but creates a delta for HCEs that can’t be overcome with tax-advantaged contributions.

As someone who was more focused on meeting shorter-term financial needs in her 20s, Susan, now in her mid-30s, worries she’ll be unable to catch up and save enough over the next few decades. After all, she, like many others, has read the communications about the magic of compounding and the benefits of saving more, early.

Many employees may find themselves in a similar position. They need to save more, and it’s likely they receive communications that encourage them to do just that. But what are we doing to help them understand that maximum saving might be out of their control? What happens and what is communicated when money is returned to them? When was the last time you sat with plan sponsors to evaluate whether many of their employees were being told to save 10% to 15% of income only to find that, due to statutory limits, they could not reach that target?

We know the value of evaluating retirement plan data to examine participant behavior, and we know the importance of saving enough—any successful retirement plan starts with adequate savings rates. But we sometimes forget there is a segment of the population that may be challenged by either IRS limits or discrimination testing. How many “Susan”s may be at your clients’ workplaces? Is 2018 the year to look at those you might think are doing fine but need more help to get, and stay, on the right track? Maybe it’s an opportunity to start discussing how to save in other plans, such as health savings accounts (HSAs)—if available—or to work with the sponsor to consider other supplementary savings vehicles. The goal of saving 10% to 15% is a good one, but the reason some employees fail to reach it isn’t always because they don’t want to or can’t afford to; there may be other forces at work. How can you help to remedy that with your clients this year?