The Fiscal Cliff and Your Retirement
Some of the tax proposals on the table to drive revenue up without raising taxes have direct implications on your 401k and other tax-advantaged retirement plans, and investors should care more than they have about this, warns Pete Kirtland of ASPire Financial Services.
Gregg Early: I'm here with Pete Kirtland, president and founder of ASPire Financial Services. Pete, you handle the management of 401(k)s and IRAs and SEP plans, and I was curious what you see as the tax implications for individuals going into...well, depending on what happens with the fiscal cliff, but assuming taxes rise at some level or another.
Pete Kirtland: Well, a lot of things can happen. Right now, the government's looking for any kind of tax revenue they can get their hands on. Of course, 401(k) plans and other qualified retirement plans are in that focal point.
And what could happen if they lower the deduction limits for qualified retirement plans? I think what you'll see is less savings, so individual participants are going to put less money in those qualified plans, which would mean that they would have less at retirement as well.
Gregg Early: And that's quite a challenge, because ultimately what's happened is we've transitioned from pensions at a lot of the large companies into these individual retirement funds. If that tax haven is no longer available, you create quite a challenge for people trying to save for their retirement, don't you?
Pete Kirtland: Absolutely. Studies show that most people are not prepared, or that their savings plan is not going to provide adequate retirement benefits, so to further reduce that is going to have what could be a devastating impact on our retirement preparedness for most participants.
Gregg Early: And what happens, are there any strategies for retirees if this were to occur?
Pete Kirtland: Well, I think one overarching strategy that's independent of whether or not this occurs: you're hearing a lot of people talk about managing participant outcomes. That's a big theme right now as we go into 2013 in the retirement plan space, and what that simply means is that people need to become educated consumers and take control of their retirement plans.
Right now, you're seeing a lot of what are called "gap analysis" tools out in the marketplace. What they do is allow participants to calculate what they want their income replacement to be and to take a look to see if they're on track to achieve it. And if they're not, most of these tools will provide strategies to improve the likelihood of success.
Gregg Early: Now, when you talk about lowering the amount of deductions for 401(k)s, does that also apply to IRAs as well, or is that a different animal altogether?
Pete Kirtland: Well, I would say everything's on the table right now.
Gregg Early: And how likely is this to occur? I mean, I haven't even heard of it up until now.
Pete Kirtland: Well, I would like to say it's unlikely, but one of the industry organizations by the name of ASPA has launched a campaign called Save My 401(k). It's a web-based strategy that will automatically generate an e-mail to the participant's Congressperson telling them to protect the 401(k) plan. So you can go to www.Save My 401(k).com and see the work that they're doing.
Gregg Early: Alright, and then also let your Congressman know what you think about it as well.
Pete Kirtland: Exactly, exactly.
Gregg Early: Apparently there are also some other changes. I was hoping you could elucidate regarding what the implications are for the individual investor...but it seems like IBM (IBM) is also changing the way it does its employee benefits, at least on the retirement side of things. Could you talk a little bit about that and tell us what it means?
Pete Kirtland: Sure. What IBM decided to do was make a modification to their plan design which would fund or calculate and fund the employer match at the end of the year versus on a payroll-by-payroll basis. So what they're trying to do is incentivize people to save throughout the year. If you're not there, I believe the way they did it was on December 15, if you're not there anymore, you do not participate in the company match.
As you know, 401(k)s are really designed from the employer's perspective to attract and retain quality employees. I guess this would fall under the "retain" component. So the implications to the individual investor are that they're not enjoying the compounding effect of growth throughout the year...but again, that could work both ways. If you had a year like 2008, it would go the other way.
Gregg Early: Right, if you were in the wrong investments at least.
Pete Kirtland: Exactly.
Gregg Early: But at the same time, what it also means is that IBM would be saving that amount of money instead of putting it into what I guess would be considered legacy programs or retention programs, as you said. If you don't stay there or if you're there for 364 days from December 15 to December 14, then they don't have to match your 401(k) contributions.
Pete Kirtland: Exactly. Now, there are some testing requirements under the code that you have to benefit-a certain number of non-highly compensated participants have to benefit-but yeah, that's exactly right. Instead of that money going into the participant's account, it's staying with the plan sponsor's checking account or corporate account and earning nominal interest along the way.
Gregg Early: And one of the concerns here is IBM's one of those leaders, so it's one of those as goes IBM, so goes a lot of corporate America and then smaller businesses as well.
Pete Kirtland: Yeah, but truth be told, this is actually a pretty prevalent plan design. It's just got notoriety because of IBM, but it's been used by a lot of small- to mid-sized employers already.
Gregg Early: Yeah, I would assume that small employers especially would be more interested in this, simply because it can be, in challenging years and especially in the past few years, it's been more and more difficult to find revenue and to be able to fund these plans at all.
Pete Kirtland: Exactly, and there are a lot of business owners out there that don't want to reward people that leave halfway through the year.