PLANADVISER - January/February 2018 - 2

editor's letter
Rethinking Savings Goals
A
s fourth quarter meetings happen at the beginning of the new year, this is a good
time to reflect on how retirement plans closed out the previous 12 months and to
consider what could or should be changed going forward. I imagine many of your
clients are looking at their plan returns and feeling pretty positive about the end-of-year
account balances their participants are seeing.
Over the week between the holidays, I heard about one area in particular that might be
worth addressing in 2018. In speaking with a friend-let's call her Susan-she shared with
me that she had set a financial goal last year only to have it thwarted by an outside force.
What was her 2017 resolution? To max out her retirement plan, meaning she would save
the greatest amount permitted under the Internal Revenue Service (IRS) limit-$18,000 last
year, $18,500 this year. I was impressed: How many people actually do this?
However, she said, while she had dutifully done her budgeting to ensure her payroll
deferral rates would meet that maximum, she ended up being told that it was likely the plan
would fail its discrimination testing and, therefore, money would be returned to her. This
was frustrating to her for multiple reasons. First, she said, she thought it wasn't fair: She
had done her part to budget and put the money into the plan, and not once had she been
told that she might be unable to defer as much as the IRS allowed.
Second, she also was upset because having that money rejected went against all of the
other information she had received from her employer and plan provider. After all, she
thought she was supposed to be saving between 10% and 15% annually. She is a highly
compensated employee (HCE), making approximately $130,000 a year, so a 10% to 15%
annual savings rate would mean deferring between $13,000 and $19,500-the higher
amount not even an option under the IRS limits.
In our conversation, I realized Susan was making a good point about the retirement
plan system, a point we don't always consider. We often fixate on the majority of people
not saving to the match maximum or at least to that 10% goal. But for those who do save
10%, is it enough? Certain studies seem to bear this lapse in the system out, saying Social
Security will make up a large percentage of lower-income employees' replacement income
but creates a delta for HCEs that can't be overcome with tax-advantaged contributions.
As someone who was more focused on meeting shorter-term financial needs in her
20s, Susan, now in her mid-30s, worries she'll be unable to catch up and save enough over
the next few decades. After all, she, like many others, has read the communications about
the magic of compounding and the benefits of saving more, early.
Many employees may find themselves in a similar position. They need to save more,
and it's likely they receive communications that encourage them to do just that. But what
are we doing to help them understand that maximum saving might be out of their control?
What happens and what is communicated when money is returned to them? When was
the last time you sat with plan sponsors to evaluate whether many of their employees
were being told to save 10% to 15% of income only to find that, due to statutory limits,
they could not reach that target?
We know the value of evaluating retirement plan data to examine participant behavior,
and we know the importance of saving enough-any successful retirement plan starts with
adequate savings rates. But we sometimes forget there is a segment of the population that
may be challenged by either IRS limits or discrimination testing. How many " Susan " s may be
at your clients' workplaces? Is 2018 the year to look at those you might think are doing fine
but need more help to get, and stay, on the right track? Maybe it's an opportunity to start
discussing how to save in other plans, such as health savings accounts (HSAs)-if available-
or to work with the sponsor to consider other supplementary savings vehicles. The goal of
saving 10% to 15% is a good one, but the reason some employees fail to reach it isn't always
because they don't want to or can't afford to; there may be other forces at work. How can you
help to remedy that with your clients this year? -Alison Cooke Mintzer, Editor-in-Chief
2 | planadviser.com january-february 2018

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PLANADVISER - January/February 2018

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