Annual Cost of Living Announcement Fest - A Satirical Explanation of the New Retirement Plan Limits

Each October brings three wonderful things - (1) Oktoberfest which according to Wikipedia is "the world's largest fun fair held annually in Munich, Bavaria, Germany. (2) Halloween which also according to Wikipedia is "a yearly celebration observed in a number of countries on 31 October, the eve of the Western Christian feast of All Hallows' Day. And (3) usually sandwiched somewhere in between these two annual diversions from working world drudgery is what I call the "Annual Cost-of-Living Announcement Fest". This is the time of the year when the IRS announces the various retirement plan limits and then every online newsletter writer and every retirement plan blogger races to be among the first to publish the limits in various places to be seen by their target audiences. 

Yep, the limits have been announced for 2015 and the Announcement Fest is in full swing - unfortunately it is just a bunch of boring numbers and no beer or chocolate included. So what do some of these numbers really mean and what relevance do they have to the real world. I won't bother to list all the limits here because by now you have saved 10 different charts of these. Oh, okay, if you really need another chart to print go here: http://401kacademy.com/materials/ and then click on the Retirement Plans Limitations Chart.

Back to what these limits mean... The first one I will discuss must depress the heck out of the great majority of 401(k) and 403(b) participants - they are now being told that they can save $18,000 in salary deferrals in 2015. Must be like an annual slap in the face to remind them how much the special, smart, successful top 1% of people in the old USA can save when they can barely afford to save anything at all. Then to add insult to injury, they are told if they are old enough (age 50 by 12/31/15) then they can save $24,000 ($18,000 plus $6,000 catch-up).

There is another group that must get frustrated as well when they see these annual salary deferrals limits and that is the group of so called Highly Compensated Employees (HCEs) who are not in a Safe Harbor Plan and so are not allowed to save the maximums either and in fact they keep getting money kicked back to them with some sort of innocuous explanation from HR about something called the "failed ADP test."

In a nutshell, some of the most pertinent limits are: Salary Deferrals $18,000; Catch-up Deferrals $6,000; Total Limit from All Contributions (deferral, match, Profit Sharing, forfeitures allocated, etc. $53,000 (add $6,000 Catch-up if over 50); amount of compensation that can be counted $265,000; amount of compensation in 2015 that will make you a Highly Compensated Employee in 2016 is $120,000 and the new Social Security Taxable Wage Base $118,500. Hey at 15.3% combined for employee and employer, that's over $18,000 being paid into Social Security in one year.

Again, see the link in my second paragraph above for all the limits in a nice, organized chart form. Heck, we even colored every other line for your viewing pleasure.

A Novel Idea for Promoting Retirement Savings - But It Will Never Happen

Like Don Quixote and Sancho Panza railing against the Windmills in the Spanish novel, The Ingenious Gentleman Don Quixote of La Mancha, here I am as a lonely and deranged TPA railing against Government retirement plan regulations. Caveat:  if you are super busy, go on to your other work because I am just tilting at Windmills here and not expecting to teach you anything or give you any valuable ideas to implement, so I have broken the first rule of social media postings. Perhaps you will find my idea entertaining or interesting if you do decide to read on.  

As a Third Party Administrator for 40 years, my life has been all about compliance, compliance and more compliance. Over the years, more and more required Notices have been forced upon the retirement plan administration industry (or more properly, upon Plan Sponsors).

We have the annual ADP test, designed, I guess, to force the Plan Sponsor to promote the 401(k) plan better with the rank-in-file employees. We have to make sure participants are given a Summary Annual Report (SAR). Please, someone (anyone!) explain to me what the SAR accomplishes in the real world! Then there is the Safe Harbor Notice, the EACA Notice, the QDIA Notice, the 404a5 Fee Disclosure Notices, etc., etc. If I was to do a complete listing, it would be too long and nobody would finish reading my blog posting.

Thinking about all of these Notices and all of the compliance work, it struck me that most everything is the Government's attempt to make employees aware of the retirement plan so that they will save for retirement. To implement and enforce all of this, the Plan Sponsors are expected to, company-by-company, develop effective communications and hold effective enrollment meetings to motivate people to engage in sufficient savings. Each financial institution doing record-keeping tries to create their own motivational enrollment books (that few participants actually read) and develop websites loaded with savings tools (that nobody uses). The Government hires many people to oversee everything (do audits, invent new notices, etc.) and that also does little or nothing to solve the dramatic savings shortfall. My years of observation tells me that all of the above efforts do not work very well! Savings rates are still abysmal.

How about a completely new, outside of the box, approach? Let's redirect some of the enforcement and audit dollars of the Government to developing a few really, really good movies or videos that can properly communicate about the wisdom of saving. Hire the best creators and movie makers from Hollywood to craft the message.  Get some A-list actors and actresses to volunteer their time "for the good of America." (yea, right!)

I am betting a team of professional screen writers, combined with professional directors and actors could come up with a handful of really effective short videos or movies that could actually educate and motivate the average participant to get off their butts and start saving. Create a movie showing a saver and a non-saver later in life - you know, at retirement. One struggling to make ends meet and one enjoying life based on decisions they made about saving years ago.  Instead of Plan Sponsors inventing their own education, just have them host meetings (on company time) to screen the movies or videos. Have record-keepers build prominent links to the movies on their websites. Pay NetFlix and Amazon to host the movies for free. Throw some advertising dollars into the promotion.  And consider even doing some rap videos - have some rap star rail against the stupidity of not doing something for the family.  You get my drift - do anything but a boring enrollment book nobody will read.

In other words, make really, really good effective, motivational movies or videos and then promote the heck out of them. Or is that just too simple of an idea?  Small plan sponsor will never fork over their hard earned dollars for the superb videos already available from some for-profit companies.

Yeh! You're right - that is crazy thinking - let's just force a few more inane notices upon everyone.  That will work! Right?

403(b) Sales Process Is Different from 401(k) Process

If you want to try to enter the hot 403(b) marketplace, you will need a certain level of patience.

403(b) prospects are not like a 401(k) prospects.

The corporate sponsor of a 401(k) can make a quicker decisions regarding changing their program.
You are usually presenting to one of two people or a small committee in the 401(k) corporate environment and if you show them a better widget, they can make the decision relatively quickly (after a little due diligence).

On the positive side, you will have less competition in the ERISA 403(b) space.  Fewer financial advisors understand 403(b) plans.  On the negative side, here is how the sales process usually goes:  (1) you gather data and then present to an HR director and perhaps a Controller; (2) if they like what they see, they then ask you come back and present to the Executive Director;  (3)  if he or she likes it, you are then asked to come back and present to the Finance Committee; and finally if they all like it, you might have to appear in front of the Board of Directors.

After all of this, you may run into a Board Member who has a close friend who is in this business and they might give him or her a shot at the business before saying yes to your offering.  Whew!  That is a lot different from presenting to the real decision makers at a corporation and getting an immediate "Yes".

Moral of the story - if you want to be successful in the 403(b) space, be patient during the sales process. However, once you get the plan, you could have it for a very long time (if you serve it well) because it is just as hard for someone new to get through this process.

Plan Design Consultants, Inc., understands 403(b)'s, can help you through the presentation process and help you select a good program to present in the first place.

"If you do not see yourself as a winner, then you cannot perform as a winner!"  Zig Ziglar