Competing for IRA
Contributions and 401(k)
The business world is competitive. So is
the political world.
Right now the stock market is not doing
very well. Opportunities exist for deposit
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are withdrawn from 401(k) plans and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
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
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
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.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Have a plan document ready to be adopted by your
- Render plan administration services or assist the
employer in retaining such services.
- 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
In summary, a financial institution must be ready to
compete for IRA contributions and 401(k) contributions.