Data & Research June 4, 2020

Surprising Findings in Savings Analysis Suggest Salary Matters Less Than Assumed

A new analysis published by EBRI in collaboration with J.P. Morgan suggests a person’s spending habits, rather than their salary, seem to have the biggest influence on whether they are a low saver or an average saver.

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The Employee Benefit Research Institute (EBRI) and J.P. Morgan Asset Management have published a detailed new white paper, dubbed “The 3% difference: What leads to higher retirement savings rates?”

According to EBRI and J.P. Morgan leadership, this white paper is the first in a forthcoming series that will draw on a newly established, shared EBRI/J.P. Morgan database that combines 27 million 401(k) participants with JPMorgan Chase & Co.’s banking database of 22 million consumers.

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“Bringing together these data sets allows us to analyze the real relationship between spending and saving, without having to rely on assumptions or projections,” says Lori Lucas, EBRI president and CEO. “In our inaugural research, we ask, why do some people save more than others, even when they have equivalent income?”

Indeed, the paper shows that, despite having similar salaries, the middle 50% of the research population save about 3% more of their salary at all ages than the bottom 25% of savers.

“This 3% difference in savings behavior, if sustained over time, could ultimately explain some of the meaningful gap that exists between the current retirement plan account balances of middle-savers and low-savers,” Lucas says.

Jack VanDerhei, EBRI research director, points to findings showing that for all income groups, the median savings percentage increases with age.

“The category of high-savers saw a much bigger increase over their working lives, though, going from 8.5% of salary saved at age 25 to 14.7% by age 65,” VanDerhei says. “On the other hand, the low-savers start at a much more modest 2.0%, rising to 3.1% by age 65.”

What’s going on here? According to the white paper, greater salaries are a big part of why the high-saver cohort can so dramatically ramp up its savings rate over time.

“However, it is very interesting and somewhat surprising to see that the salaries of middle-savers and low-savers are very close to each other, and the average salaries of the two groups converge over their working lives,” VanDerhei says. “That’s the major finding here. There’s only a 6% difference in the median salary for middle-savers versus low-savers at the start of their careers, and it diminishes over time. That should be really eye opening. It shows the influence of spending behaviors on savings can outweigh the influence of salary.”

Katherine Roy, chief retirement strategist, J.P. Morgan Asset Management, notes that spending as a percent of salary is meaningfully higher for low-savers versus middle-savers. Roughly 74% of salary is spent for the youngest group of low-savers, versus 70% for middle-savers. The gap remains pretty steady until age 45 to 50, when the spending levels basically merge.

Zooming into the data, it is clear that low-savings households are spending more on the food/beverage category, as well as on housing/transportation. Travel spending is more in line for the two groups, and in fact, middle-savers actually spend more on travel.

The EBRI and J.P. Morgan leaders say these findings will be explored in forthcoming research, because it is important to ask about the specific factors that might influence the increased spending of certain groups. They say it will also be important to compare dual-earner households with single-earner households.

Compliance June 3, 2020

IRS Provides Relief for Participant Elections Required to Be Witnessed

Notice 2020-42 provides temporary relief from the physical presence requirement for any participant election witnessed by a notary public in a state that permits remote notarization or witnessed by a plan representative using certain safeguards.

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In response to the COVID-19 pandemic and the related social distancing that has been implemented, the IRS is providing temporary relief from the physical presence requirement in Treasury Regulations Section 1.401(a)-21(d)(6) for retirement plan participant elections required to be witnessed by a plan representative or a notary public, including a spousal consent.

The IRS says the temporary relief, which covers the period from January 1 through December 31, is intended to facilitate the payment of coronavirus-related distributions (CRDs) and plan loans to qualified individuals, as permitted by Section 2202 of the Coronavirus Aid, Relief and Economic Security (CARES) Act. However, the temporary relief applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

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Notice 2020-42 provides participants, beneficiaries and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election witnessed by a notary public in a state that permits remote notarization or witnessed by a plan representative using certain safeguards.

In the case of a participant election witnessed by a notary public, for the period from January 1 through December 31, the individual may use an electronic system facilitating remote notarization if executed via live audio-video technology that otherwise satisfies the requirements of participant elections and that is consistent with state law requirements that apply to the notary public.

For the same period, in the case of a participant election witnessed by a plan representative, the individual may use an electronic system using live audio-video technology if the following requirements are satisfied:

  • The individual signing the participant election must present a valid photo ID to the plan representative during the live audio-video conference, and may not merely transmit a copy of the photo ID prior to or after the witnessing;
  • The live audio-video conference must allow for direct interaction between the individual and the plan representative (for example, a pre-recorded video of the person signing is not sufficient);
  • The individual must transmit by fax or electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed; and
  • After receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with the requirements of the notice and transmit the signed document, including the acknowledgement, back to the individual under a system that satisfies the applicable notice requirements.

According to the notice, Treasury Regulations Section 1.401(a)-21 sets forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections with respect to a retirement plan, an employee benefit arrangement or an individual retirement plan. Section 1.401(a)-21(e)(6) defines a participant election as any consent, election, request, agreement or similar communication made by or from a participant, beneficiary, alternate payee or an individual entitled to benefits under a retirement plan, employee benefit arrangement or individual retirement plan. Section 1.401(a)-21(d) sets forth the following conditions for participant elections:

  1. The individual must be effectively able to access the electronic medium used to make the participant election;
  2. The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making the participant election;
  3. The electronic system must provide the individual making the election with a reasonable opportunity to review, confirm, modify or rescind the terms of the election before it becomes effective; and
  4. The individual making the election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements.

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