These 7 Megatrends Will Redefine the Future of 401k Plans
Our previous article featured industry veterans discussing a litany of 401k problems and their suggested solutions. It turns out, problem solving is relatively easy compared to thinking outside the box. Said another way, staying inside the box is a lot easier than venturing outside the container’s boundaries. Alas, such is the demands of creativity. But the fruits of creativity can yield innovations far beyond the limits of our own imaginations. That’s when things take a quantum leap, and we establish a foothold on the next level of what we call our “standard of living.”
In the past, we’ve offered our own versions of some “futuristic” retirement plans – from “401k 2.0” (December 7, 2010) to the “Child IRA” (February 25, 2014). In this piece, we focus on several megatrends that appear likely to forever influence 401k plans as we know them. Some of these megatrends are in the process now of changing the 401k world, while others seems more science fiction at this point. It is possible, however, today’s retirees won’t even recognize the 401k of thirty years from now. Here are the megatrends we’ve identified:
#1) The Rise of Professional Advice: Even as we write, more and more 401k plans are taking advantage of the Individual Advice Rule issued by the Department of Labor in December 2011. Prior to its issuance, it was practically impossible to offer individual participant advice, although many plans continue to believe individual participants did receive individual advice prior to the issuance of this legal rule. We regularly see studies that show investors who received advice tend to do better than those that don’t. Jeff S. Vollmer, founder of Hyde Park Wealth Management in Cincinnati, Ohio, cites this “fee for service retirement plan counseling” occurring today as, he says, more and more advisors, “lend their consultative planning services to 401k plans for a fee.”
#2) Enhancing the Tax Code (But Not In Ways You Think): Jamie Hopkins, assistant professor of taxation in the Retirement Income Program at The American College in Bryn Mawr, Pa., and associate director of the New York Life Center for Retirement Income, “Changes in the tax code could provide additional savings benefits. With the government pushing retirement savings, it could be possible to see increased tax breaks for retirement savings. Some things that could be easily implemented would be significant increases to the total amount of qualified contributions allowed to IRAs, Roth IRAs, and other qualified retirement plans.”
“Limits are too low and the catch-up contribution is too low,” says Steven D. Brett, President of Marcum Financial Services, LLC, Melville, New York. “We need to remove the puny annual $5,500 ceiling on ‘catch-up’ contributions for those over 50, and increase the amount that individuals can contribute to a plan.”
But opening up the tax code to encourage more contributions may come at a cost. Hopkins also sees the government putting “limits on the ability to convert money from an IRA or qualified retirement plan to a ROTH IRA.” He says, “Currently, there are fairly liberal rules allowed for the conversion of money in an IRA to a ROTH IRA. However, this gives many people a backdoor into Roth IRAs that otherwise cannot make contributions because of the phase-out income limits on contributions to Roth IRAs. It would not be impossible to see a limitation placed on the ability to convert from an IRA to a Roth IRA based on income levels.”
#3) Addressing Leakage (But Not In Ways You Think): There are two schools of thought on the seriousness of this issue of leakage. On one hand, “true” leakage – where the money is never returned – is considered “bad” while a situation where the money is paid back with interest is considered “good.” Brett says, “People can borrow and cash out when changing jobs. It is too easy to obtain a loan against saved retirement plan assets as well as withdraw or take distributions from a plan. Typically a larger number of job changers cash out of at least part of their account balances rather than leaving money in the plan or ‘rolling it over’ to an IRA or new plan. This will have a long-term impact on the amount of funds available to future retirees since they are losing the impact of compounding and deferred growth over many years.
On the other hand, Vollmer says, “Federally permitted $10,000 401k withdrawal, tax and penalty free: those of any age can withdraw up to $10,000 from their retirement plans, tax and penalty free, to jump start economy, pay down debt, etc.: advisors can counsel participants on the best utilization of that withdrawal.” He believes the “nation benefits through additional retirement plan-driven stimulus.”
#4) Integrating Technology (and, by that, we refer to the “New Media”): The first wave of technological integration came about in the 1990’s and it allowed participants to interact daily. Some say this is a problem, so we can’t assume automatically taking advantage of technology will always lead to helpful results. Nonetheless, it’s here and, well, programmers need jobs just as much as journalists do. Daniel Sentell, Director of Communications at Broad Financial in Monsey, New York, says, “As the next tech savvy generation enters the realm of retirement planning, they’ll be very comfortable with the concept of an online one-stop-shop for retirement planning. ‘Choose your plan, get a quote, transfer your funds.’ It’s working for insurance, and it can work for retirement as well.” Remember, in the on-line world, “one-stop-shopping” doesn’t necessarily mean the same company. Think of how internet-based travel services find all the different hotel rooms and then presents them in order of price.
#5) The Invasion of the Millennials: It seems like only a rock-n-roll career or two ago that the baby boomers were the sole influence on our culture. Well, there’s a new sheriff in town and they won’t brook no gruff from this older generation. Say “Hi” to the Millennials, the new hipsters, the coming cohort, the future of our species. They are intimately tied to our fourth megatrend (technology). Dan McElwee, Executive Vice President of Ventura Wealth Management in the Greater New York City Area, says, “The greatest opportunity that the retirement plan industry can capture is the new wave of millennials investing in the market. This group, coming of age in the tech bubble and housing crisis, has a very conservative investment philosophy. Savvy advisors willing to utilize multiple means of communication can educate and engage this age group and help develop retirement plans that will mature with these new clients.”
#6) Personalization (and portability) of Retirement Plans: Sure, today you can rollover these things are will (well, maybe not any more), but this megatrend refers to the de-linkage between the retirement plan and corporate sponsorship. In the future, the retirement plan will be attached to the employee, not the employer. (This concept, by the way, was first introduced in our 401k 2.0 article). Brett says, “Not enough people have access to a plans. The plans are offered through employers only, so if the employer does not offer a person cannot save into a plan. [Retirement plans] may need to be de-linked from employers giving all individuals access to a plan regardless of employment status. There possibly should be a national program that can be opened with any custodian/trustee.”
#7) Holistic Integration: Adding all these megatrends together inevitably leads to this. Vollmer defines holistic as “Budgeting, savings, debt avoidance, investing, risk management and asset protection” and includes all retirement preparation consultation.” As a result, we can see a trend towards consolidating defined contribution and defined benefit plans into one. Scott Price, CPA, Principal at Bond Beebe Accountants near Washington, D.C., says, “There is an opportunity to create new retirement plans and solutions based on the best features of both defined contribution and defined benefit plans. For example, annuitizing defined contribution balances at the time of retirement can result in a safe and predictable retirement income stream.”
Hopkins takes this a step further and sees integration of all existing employee benefits into one package. He sees a trend towards “National Long-Term Care Insurance or a move to increase Employer Provided Coverage. While the CLASS act was not successful, the government is still looking for ways to better prepare people for the risk of long-term care. Currently, Medicaid shoulders much of the financial burden and family members of the individual in need of care shouldering much of the care responsibilities. While the future of long-term care financing is uncertain, what is certain is that the current system is not sustainable. Employer sponsored long-term care insurance policies, a National long-term care insurance program, or increased tax advantages for saving for long-term care insurance are likely changes.”
Beyond this, the megatrend of holistic integration can include aspects we can only begin to imagine, from fiscal health to physical health. Already, the internet is rife with “self-help” programs purporting to address these personal issues.
The great thing about the future is there are almost no boundaries. In the end, this is the best way to solve problems – before they happen.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.
Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).