Studies abound showing that minorities and women have a difficult time saving for retirement, but in the current economy the challenges of putting money away for the future are plaguing most middle-class Americans.
President Obama is trying to tackle that problem by making it easier for employees to boost the bottom line of their 401(k)s or IRAs. Changes he supports that are being enacted in 2010 provide a good opportunity for financial advisors to reach out to current and potential clients and at the same time may help middle-class individuals to save more.
Starting next year, employees will automatically be enrolled in 401(k) plans, rather than having to choose to be enrolled. Employees will need to opt out of plans if they don't want to participate. Currently, employers can offer an opt-out plan, but do not have to do so. It's uncertain whether the new provision will apply to all employees or only new hires.
This feature has been shown to benefit younger workers in particular, those who often don't think about retirement, says Thomas Foster, the national retirement spokesperson for the Hartford, an insurance-based financial services company. The feature also particularly helps small businesses without human resource departments because they can, says Foster, "enroll employees into accounts at the date of hiring unless the worker opts out. It is the wave of the future ... that takes away any burden of nondiscrimination testing."
However, the Internal Revenue Service still needs to write specific regulations on how this change and others should be implemented. Foster hopes the rules will be written simply. "There was a two-sentence change for minimum distributions of retirement assets some years ago, and it took the IRS 500 pages to write the regulations for it," he says. "So conceptually, the changes to the IRS rules proposed by President Obama sound great, but the IRS has not done its part yet."
Thomas Noble, founder and president of the Noble Group, a benefits-consulting firm and advisor to retirement plan sponsors in Houston, agrees wholeheartedly that the change is a positive one. "It is a tremendous feature that will lead to additional savings," he says.
The rules will also be changed to allow employees to put the monetary value of unused sick days and vacation time into retirement accounts, which Foster says will further boost workers' retirement savings. Yet this provision could also pose challenges for employers, their workers and financial advisors. For one thing, employers will have to provide matching contributions for the value of those days off at the same level of other employee contributions.
"Companies are looking for ways to cut costs right now, so this could be a difficulty if they have to match more deferred income contributed by employees," Noble says. But employer contributions are a tax-deductible business expense, so that lowers the cost somewhat.
At the same time, employees and their advisors will have to make sure the added contributions from vacation and sick time do not exceed the limits for 401(k)s and IRAs, which are not changing. The employee tax-deferred contribution limit will remain at $16,500 annually for 401(k)s and $5,000 annually for IRAs. An exception allows people 50 to 70.5 years of age to contribute a maximum of $6,000. In 2010, the limits will be indexed to inflation. Foster thinks it would be helpful for the federal government to relax some of the contribution limits.
"One client has already sent me the proposed guidelines and asks how to take advantage of it, but most have not brought up the changes yet," says Noble.