Products July 11, 2011

Wisconsin’s 529 Plan Adds Low-Cost Portfolios

Wells Fargo Funds Management and the Wisconsin College Savings Program Board have announced several changes to EdVest, Wisconsin’s college savings plan. 
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Effective July 8, 2011, three index portfolios were added to EdVest.The reason for this addition is to provide more low-cost options for plan participants, said Jim DiUlio, Wisconsin’s 529 College Savings Program Director.

One of the new portfolios is the Vanguard International Index Portfolio. It invests entirely in the Vanguard Total International Stock Index Fund, providing a 100% international index investment option. In addition, the existing Baird Bond Portfolio and Legg Mason Aggressive Portfolio have become low-cost index portfolios. The Baird Bond Portfolio has become the Vanguard Bond Index Portfolio, and the Legg Mason Aggressive Portfolio has become the Vanguard Small Cap Index Portfolio. These two shifts result in reductions to underlying fund expenses of nearly 23 basis points and 71 basis points, respectively.

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With these changes, EdVest now offers five low-cost Vanguard options covering international, domestic, fixed-income, and balanced asset classes to complement the diversified Wells Fargo portfolios currently available in the plan.

Additionally, the underlying investments in the four Wells Fargo-blended portfolios with an equity component have been reallocated to gain a direct exposure to emerging markets. Wells Fargo says that emerging markets have “proven to be one of the few sources of robust economic growth over the past 10 years. They contributed more than 50% to global growth in the late 2000s and have seen their share of global gross domestic product increase from 24% to more than 35% during the past five years. Emerging markets provide a way to add additional economic diversification while maintaining a level of volatility that has generally been consistent with domestic small-cap stocks.”

Data & Research July 11, 2011

Capping Tax Preferred 401(k) Contributions Helps No One, Says EBRI

The Employee Benefit Research Institute (EBRI) found that the proposed tax reform regarding 401(k)-type retirement plans from the National Commission on Fiscal Responsibility and Reform would hurt both the highest- and lowest-income workers.
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EBRI’s research finds the Commission’s recommendation to cap the annual tax preferred contributions to either $20,000 or 20% of income (whichever is lower) for 401(k)-type plans – referred to as the “20/20” cap – would most affect the highest-income workers—not surprising, since those with high income tend to save the most in these kinds of retirement plans. However, EBRI also found the cap would cause a big reduction in retirement savings by the lowest-income workers as well.

The analysis finds that for each age group (except for the oldest), the lowest-income group has the second-highest average percentage reductions in 401(k) contributions. Primarily, this is because their current or expected future contributions would exceed 20% of compensation when combined with employer contributions.

“Phrased another way, the 20/20 cap would, as expected, most affect the highest-income workers, but it also would cause a very big reduction in retirement accumulations for the lowest-income workers,” said Jack VanDerhei, EBRI research director.

Currently, the combination of both worker and employer 401(k) contributions is the lesser of a dollar limit of at least $49,000 per year, or 100% of an employee’s compensation.

The results are from EBRI’s Retirement Security Project Model and are published in the July 2011 EBRI Notes, “Capping Tax-Preferred Retirement Contributions: Preliminary Evidence of the Impact of the National Commission on Fiscal Responsibility and Reform Recommendations,” available online at http://www.ebri.org. The analysis breaks down results by age group and by relative income group.

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