Company’s sponsor defined contribution plans to attract, retain, and motivate quality workers. What brand names do your employees associate with your 401(k) or profit sharing plan?  Is it the service provider’s brand, your company’s name, or both?  Branding your plan with your company’s name is an important part of conveying the benefits of your plan to plan participants.  Plan participants need to associate their plan with their employer.  They need to be reminded of the significant contributions made by their employer in structuring, designing, maintaining, updating, and administering their plan. They need to be reminded of the financial commitment made by their employer in support of the plan and the impact that commitment can have on their personal financial well-being. Unless the company’s name is strongly identified with its defined contribution plan and its benefits, participants will not properly appreciate the company’s valuable role and the reasons for plan sponsorship will not be served.

Other than me, only one other person in a room with more than 100 conference attendees raised their hand when asked how many of us were communicating the availability of the Saver’s Credit to our 401(k) participants. 

Where’s recognition of the Saver’s Credit, the tax credit for low- and moderate-income 401(k) savers? I am dismayed that a program potentially benefitting as many as one-third of people who contribute to 401(k) plans is not described in 401(k) communications. I am especially concerned that this program is not being communicated to particpants who are automatically enrolled in their 401(k) plans. The sacrifice from saving for retirement is more keenly felt by those at lower incomes. We should do everything we can to ameliorate that pain. Informing them that plan contributions can reduce a low-income 401(k) saver’s Federal income tax is an easy way to help.    

For those unaware of the program here are the specifics:

In order to qualify for a special tax credit of up to $1,000 someone must be:

• 18 years of age or older
• Not a full-time student
• Not claimed as a dependent on someone else’s return 

In addition, they must meet one of the following financial criteria:

• File their taxes individually with an income of $28,250 (indexed) or less
• File their taxes as head of household and have an income of $42,375 (indexed) or less
• File their taxes jointly with an income of $56,500 (indexed) or less 

The tax credit ranges from 10 to 50 percent of each $1.00 contributed, up to the first $2,000 contributed to a 401(k) or an IRA. That’s between $200 and $1,000 directly off the income taxes they pay. If someone and their spouse both contribute to a 401(k) plan or IRA, they may both be eligible to receive a credit. The amount of the tax credit depends on the amount of the adjusted gross income and is phased out as the person’s income increases. The tax credit is in addition to other favorable tax treatment for 401(k) participation, such as the deferral of income tax on contributions. It should be noted note that this credit applies only as a reduction to the income tax liability, not as cash in hand via a refund.

Plan sponsors are constantly looking for ways to improve their 401(k) programs, especially ways that don’t hit the sponsor’s bottom line. Communicating the Saver’s Credit is a win-win. At virtually no cost, it can help increase savings by lower-paid employees, and those who benefit will appreciate those who showed them the way. 

How do we convince our younger workers that they have been given a great gift, but only if they do some work? Better than a new car or even winning the lotto, they have given the gift of life. In 1940 those who reached age 65 lived to receive Social Security benefits for three years. For today retirees that statistic is 15 years and growing. According to the International Monetary Fund, people worldwide are living three years longer than expected on average, but governments are ill prepared. The medical resources available to older populations will also be stressed. There is one estimate that by 2050 there will be only one worker for every retiree. The demographics are daunting. It is likely that those under 40 who live healthy, financially comfortable lives for all those years in retirement will have taken action to accumulate personal wealth and will have taken action so that they are healthy without significant intervention by the healthcare system.  

To help our younger workers, we can adopt a new philosophy that focuses on connecting the physical and financial wellness message. The link is a philosophy of self-regulation. Self-regulation, according to Professor Chatterjee in a paper scheduled for publication this year in the Applied Economics Research Bulletin, is “a process of setting standards for oneself, monitoring one’s actions and making focused interaction to stay on track with one’s personal goals – whether dieting, saving money…”

As we help prepare our older workers for retirement, we want to be able to say, “You have good health and the money to enjoy it because as you were working you lived a healthy lifestyle, and saved for retirement.” We can communicate an optimistic future to our young workers, but it needs to include the message that they have to help make it happen—and that message should address both health and saving for retirement.

Much attention is paid to how well DC plan participants are doing. Most reports are based on the participant’s balance in their current plan. This measure is too narrow. Most people have less than 10 years of service with their present employer.  According to PSCA’s 54th Annual Survey, the average retiring participant has worked approximately 16 years with their final employer. Most workers spend their other 24 years of employment with six employers where they have relatively short tenure. In our emerging DC world, when people retire they have retirement savings in addition to what accumulated in their current employer’s plan. This was demonstrated by a recent study by Fidelity Investments. Fidelity found that individuals 65-69 with only a 401(k) with Fidelity had an average of $123,400. Those 65-69 who had both 401(k) and IRA account balances with Fidelity had average total retirement savings of $359,000. Why the difference? The first group is likely those for whom Fidelity Investments is administering only the 401(k) savings accumulated with their final employer. The second group has aggregated their retirement savings from all sources with Fidelity Investments.

If you want to know how workers are doing you have to go beyond the balance in their current plan. By the way, it’s interesting that $123,400 is approximately what a typical 401(k) participant retiring today could have accumulated over the previous 16 year period.

Currently private employer-sponsored defined contricution plan participants who have changed jobs, or who are no longer employed but not retired, have chosen to leave approximately 15 million account balances with their previous employer(s). In 2009,  more than 1 million retirees were receiving installment payments from an employer sponsored plan, up from 746,000 in 2007 — a 36 percent increase in two years. While for most terminating DC participants the current practice is to roll their defined contribution balances into an IRA when they change jobs or retire, it is also true than many choose to leave them where they were accumulated. This second option is about to become more popular. 

The lowest fees an investor can pay anywhere in the world are those paid by participants in a large U.S. employer-sponsored defined contribution plan.   Because of fee disclosure, it will now be easy to do an “apples to apples” comparison of the fees they would pay in an IRA with those they would pay if they leave their money in an employer-sponsored plan when they terminate employment. Once it is easy to understand that the equivalent investment program in an IRA is several times more expensive than that of their employer plan, considerably fewer terminating large company employees are going to roll over their balances into an IRA.

Large employers appear to be welcoming this decision by their retirees. In 2010, 72.3 percent were making installment payment arrangements available as a retirement distribution option. This is up from 61 percent in 2006. At the same time in 2010, 26.5 percent of large plan participants with an account balance were terminated vested employees. Many large plan sponsors want their retirees to maintain their accumulated assets in their plans when they retire. Fee disclosure will boost this participant decision. Along with it, however, will likely come millions more account balances of terminated vested employees.