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January 2019

Competing for IRA Contributions and 401(k) Contributions

The business world is competitive. So is the political world.

Right now the stock market is not doing very well. Opportunities exist for deposit instruments

IRAs and 401(k) plans are competing retirement plan types, but they also are interrelated. They both play an important role in the U.S. retirement system. There is more wealth held in IRAs (9.3 trillion) than in 401(k) plans (5.6 trillion). But it is not because of individuals making annual contributions into IRAs. It is because people change jobs or retire and the 401(k) funds are generally directly rolled over into an IRA. $400-$500 billion per year are withdrawn from 401(k) plans and other retirement plans and directly rolled over into IRAs.

Although the tax rules allow a person to annually make contributions to a 401(k) plan and also to an IRA most do not make both contributions. Most individuals will only make annual contributions to their 401(k) account within their employer’s 401(k) plan.

There are approximately 150 million tax returns filed in the U.S. 120 million of these returns show that individuals are eligible to make an IRA contribution. Only 11% of individuals eligible to make a traditonal IRA or Roth IRA do so. The amount contributed to traditional IRAs is
22 billion.

Many Americans (110 million tax returns) are eligible to make an annual IRA contribution but choose not to.

One purpose of this article is - it is time to start competing. If you want the business (more IRA contributions), step one is to ask for them and step two is to earn them. Have a competing investment product The same is true for pension contributions.

Our country is certainly split along differing political and economic philosophies. One group believes and argues an employer should be legally required to make pension contributions on behalf of its employees. It is not enough that the employer pays the 7.65% tax for social
security and Medicare. Some states (Oregon, Illinois, California, et al ) are requiring employers who don’t sponsor a pension plan to establish one. Such state laws most likely will be found to violate ERISA, but time will tell. One way to help your customers will be to help them establish a plan with contributions being made with your institution rather than using the state sponsored plan.

The opposing philosophy is, an employer should have the freedom whether or not it will make pension contributions to benefit its employees. However, an employer that makes such contributions will receive tax benefits. This is current federal law. Because of these federal tax benefits and to be competitive against its competing businesses, many employers will sponsor a 401(k) plan or a SEP-IRA plan.

The second purpose of this article - no one needs to have their employer make their “pension” contribution because he or she is eligible to make an annual IRA contribution. Individuals should take responsibility and start making their own IRA contributions. Individuals should be informed regularly that they should to be making IRA contributions, especially if they don’t participate in a 401(k) plan.

  1. Here are some ideas for increasing IRA contributions.
    A person should be able to make their annual IRA contribution on-line and people need to be informed and convinced why and how they will benefit. So, start implementing the making online of annual IRA contributions, especially Roth IRA contributions.

    A person should be informed that annual contributions may be done online and the contribution is processed as a current year contribution unless instructed otherwise. The person should be informed that he or she must contact the financial institution for assistance if a rollover contribution, a SEP-IRA contribution or a transfer contribution is being made.

    A person should almost always be making a Roth IRA contribution rather than making a contribution to a standard savings account. Why? A person can generally make a Roth IRA contribution and withdraw it without adverse tax consequences. For example, Margrit contributes $4,000 to her Roth in January and then in October withdraws $1200 of the $4000. She owes no income tax as she is only withdrawing her own contribution. The withdrawal of the earnings from a Roth IRA are often taxable, but earnings are withdrawn only after all contributions have been withdrawn.
  2. Encourage SEP-IRA contributions. Annual contributions of $55,000 can multiply greatly if there are multiple employees making/receiving such contributions. Many employers will not want the complexity which comes with a 401(k) plan and there is certainly less liability. Refer to the October 2018 issue discussing how a small employer may be able to realize some FICA tax savings by sponsoring a SEP IRA plan.
  3. Enlighten your higher income customers so that they come to understand how they will benefit by making non-deductible contributions even though they are making maximum contributions to their 401(k) plans.
  4. Encourage Direct Rollovers and Rollovers Into IRAs from 401(k) plans and other retirement plans. An institution must “work” or “compete” to gain rollover contributions.
  5. Develop a payroll deduction IRA program that can be used by your institution’s business customers and also for your institution’s staff. As an additional employment benefit, an employer could adopt a plan giving the employer the right to make discretionary matching Roth IRA contributions. For example, for every $500 which an employee contributes to their Roth IRA for a given year,
    we the employer will make a matching contribution of $50 up to a maximum of $400. The employer contribution is ordinary wage compensation for federal tax purposes.
  6. Develop an IRA contribution program that can be used by your institution’s business customers and also for your institution’s staff. As an additional employment benefit, an employer could adopt a plan giving the employer the right to make discretionary IRA contributions. The employer contribution is ordinary wage compensation for federal tax purposes.
    1. Develop a competitive IRA deposit instrument that has a long-term feature. Such IRA deposits can be used to fund the making of mortgages. In the insurance world these IRA deposit instruments are called guaranteed investment contracts. There is a sophisticated formula used to calculate the interest penalty when the longer term deposit instrument is surrendered prior to maturity.
      In the past the banking regulators have ruled that such investments have risks that should not be taken by banks for safety and soundness reasons. The regulators should rethink their position. The interest rate penalty provision will offer sufficient protection to the IRA custodian against those who surrender a long-term time deposit prior to maturity.

      Here are some ideas for increasing 401(k) contributions and profit sharing (old Keogh) contributions.
      1. Have a plan document ready to be adopted by your client.
      2. Render plan administration services or assist the employer in retaining such services.
      3. For your institution’s own 401(k) plan require that such plan be written to allow as one of the investment options the purchase of your institution’s sponsored time deposit.

        In summary, a financial institution must be ready to compete for IRA contributions and 401(k) contributions.