Trust in Social Security Falters in 2018 Planning & Progress Study

About one in three Americans have less than $5,000 in retirement savings, and one in five have no individual private retirement savings at all, according to a new Northwestern Mutual study.

Northwestern Mutual has published its 2018 Planning & Progress Study; this year the annual research report is subtitled “Living Long and Working Longer” and focuses on the sizable opportunities and challenges facing U.S. workers and their long-term financial security.

The underlying data set represents some 2,000-plus U.S. adults, including an “over-sample of 601 interviews with U.S. Millennials age 18 to 34.” Responses were weighted to be representative of the U.S. population based on Census targets for education, age, gender, race/ethnicity, region and household income.

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Across this broad group, nearly eight in 10 people say they are “extremely” or “somewhat” concerned about affording a comfortable retirement, and two-thirds of U.S. adults believe there is a real chance they will outlive their savings. At the same time, Northwestern Mutual reports, about one in three Americans have less than $5,000 in retirement savings, and one in five have no individual private retirement savings at all. The average amount of retirement savings reported came in at just about $85,000, which is far short of what most Americans can expect to pay for health care expense alone in retirement.

Thinking about the deeper future, three-quarters of Americans believe it is “not at all likely” or only “somewhat likely” that Social Security will be available when they retire. While nearly half of adults say they have taken no specific steps to prepare for the possibility of outliving their individual savings, 23% say they have recently increase the amount they save each month. Another 18% say they have put together a financial plan, nearly the same number who have purchased new investments (17%) or sought professional financial advice (17%).

Another point of concern in the data is the increasing number of Americans who anticipate retiring at 70 years or older than in the “traditional 65 to 69 range.” Within the group expected to work beyond 70, 55% suggest this will be due to necessity and 45% say it is their choice. Importantly, these figures contravene real-world statistics showing most people still retire in the 65 to 69 range, if not earlier.

According to the Northwestern Mutual survey, among the more than half of Americans expecting to work past the traditional retirement age by necessity, the main reasons were inadequate savings and a lack of confidence in Social Security’s ability to take care of their needs. Other concerns cited touched on rising healthcare costs or caring for loved ones.

NQDC Plans Still Valuable After Tax Reform Changes

“Non-qualified deferred compensation plans will always be tax advantageous and a useful benefit,” Bruce J. McNeil, partner with The Wagner Law Group, told Plan Sponsor Council of America (PSCA) 71st Annual National Conference attendees.

The Tax Cuts and Jobs Act of 2017 included changes to the treatment of executive compensation and non-qualified deferred compensation (NQDC) plans that some said will take away the incentive for employers to sponsor these plans.

For example, a Benefits Brief from Groom Law Group states, “These proposed changes have the effect of eliminating the opportunity for an executive of any company or organization to defer taxation of earned income outside of a tax-qualified retirement plan and would trigger income recognition for long-term incentives once a continuing service vesting condition lapses, effectively without regard to when the amounts are actually payable.”

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However, speakers at the Plan Sponsor Council of America (PSCA) 71st Annual National Conference suggested executive compensation plans are still a useful benefit. “Non-qualified deferred compensation plans will always be tax advantageous and a useful benefit,” Bruce J. McNeil, partner with The Wagner Law Group, told conference attendees.

Changes for equity compensation plans

R. Lee Nunn, a senior vice president at Aon Hewitt, explained that the tax law changed Section 83(i) of the Internal Revenue Code (IRC), such that U.S. based employees of private companies who are granted stock options or restricted stock units may elect to defer income taxation for up to five years from the exercise or vesting date and wait around to pay the tax. This allows employees to know the tax at the time of election. Among other requirements, an eligible employee cannot be an executive at the company. The rules include a look-back period to determine who has been an owner, CEO or other excluded employee.

Nunn said 80% of non-excluded employees are eligible to participate, and the equity compensation plan can be discriminatory as of now. To take advantage of this, an employee must elect to defer the tax associated with the stock within 30 days of the first date the employee’s rights to the qualified stock are transferred or vested, whichever is first.

Fair market value of the stock, less the amount paid for the stock, will be subject to taxation on the first of the following to occur:

  • The first date stock becomes transferrable;
  • Date employee becomes an excluded employee;
  • First date the corporation’s stock becomes readily tradable on an established securities market;
  • Five years after first date the equity grant vests or becomes transferrable; or
  • Date employee revokes election.

Nunn also notes that the failure to provide participants with notice of eligibility may result in a $100 fine for each day up to $50,000 in a calendar year.

Changes for NQDC plans

Nunn said Section 162(m) of the IRC started with the idea that executives are paid too much, so employers could pay someone $1 million and receive a tax deduction, but for earnings greater than that, there would be no deduction. The new bill expands the definition of compensation for purposes of the $1 million deduction limit to include all remuneration paid for services by eliminating the performance-based compensation and commission exceptions for compensation paid to top executives at publicly traded companies.

In addition, Nunn noted that the Securities and Exchange Commission (SEC) had previously changed the rules so that the chief financial officer (CFO) of a company was not a covered employee. However, under new act, the definition of “covered employee” expanded to included anyone who is the chief executive officer (CEO) or the CFO at any time during the tax year and the three highest paid officers during the year. Nunn said, “Once a covered employee after 2016, always a covered employee.”

According to Nunn, the tax reform bill also changes Section 4960, so that tax-exempt employers must now pay a 21% excise tax on compensation greater than $1 million paid to executives.

According to Kelly Davis, partner with Clifton Larsen Allen, the excise tax must be paid not only on compensation but on 457(f) tax-exempt non-qualified plan benefits that vest. “The [Internal Revenue Service] IRS is saying if the company is really a not-for-profit, it shouldn’t be acting as a for-profit by paying excessive amounts to executives,” she said.

McNeil said, “For 457(f) plans, companies can roll forward the substantial risk of forfeiture to defer a taxable event to a future year.”

Top Hat Plans Still Valuable

The speakers noted that these plans, also called “top hat plans,” still offer valuable benefits such as:

  • Employers can be restrictive on who participates in top hat plan;
  • Top hat plans are subject to minimal regulatory compliance;
  • A plan is not subject to tax law limits;
  • These plan can be used as a golden handcuff, or recruiting, incentive;
  • Choice of funding vehicles, for example between rabbi trust or secular trust; and
  • Design flexibility with no discrimination rules.

“Recent tax law changes for individuals shouldn’t change anyone’s decision about whether to defer or not,” Nunn said. “On the employer side, if the tax bracket has dropped then when someone chooses to defer, the lower tax rate improves the employer’s cash position. These plans are more attractive for employers to offer than before.”

Davis said her firm has seen an increase in the number of discussions with clients about offering equity compensation or NQDC plans.

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