Reinventing After-tax Contributions

Today’s plan advisors have a huge opportunity to rethink the design of the corporate sponsored retirement plan in a way that will work in parallel with many companies’ financial wellness goals, says Jania Stout, managing director and co-founder of Fiduciary Plan Advisors at HighTower.

Writing in the spring issue of NAPA Net the Magazine, Stout offer some ideas on how a plan can be redesigned to become more than just a retirement savings plan.

Today most households are living in debt, and many are burdened with saving for college or paying off high tuition bills, notes Stout. “One of the critical components to be able to control debt is to establish an emergency fund. Why not create this savings options inside the DC plan?

“Why not automatically enroll everyone into the plan and put the first $1,000 or $3,000 into an after-tax emergency fund; once the default amount is reached, it switches to pre-tax,” she suggests. “Even better would be to build the record keeping systems so that they know when the emergency fund has been depleted,” at which point the deferrals would shift back into after-tax mode to replenish the emergency fund.

“If we could get that working, the number of loans in a plan would drop dramatically and our participants would understand the power of having an emergency fund,” Stout suggests. “Perhaps credit card debt would stop creeping up and those payments that were being sent off to pay off high-interest balances would be freed up” and instead directed toward participants’ retirement savings goals.

“This shifts the feel of the traditional DC plan,” Stout notes. “It makes it more relevant and more attractive to many who are searching for a way to take care of their financial picture both now and for retirement.”

There are potential issues with adding an after-tax source, notes Stout, so this idea needs to be carefully evaluated before it is adopted. For one thing, after-tax money is categorized as an employer contribution, so it could affect the ACP testing of the plan. And Roths won’t work because of the limitations on accessing this money prior to retirement or termination — but an after-tax source can be distributed at any time.

In addition to Stout’s regular “Inside Financial Wellness” column, the spring issue of NAPA Net the Magazine includes the cover story on NAPA’s top plan advisors under 40, as well as feature articles on custom TDFs and the Obama administration’s take on open MEPs. The issue also features insights from regular contributors Jerry Bramlett, Steff Chalk, Nevin Adams, David Levine, Brian Graff, Don Trone, Joseph DeNoyior, Warren Cormier, Fred Barstein and Lisa Greenwald Schneider.

To view Stout’s column, click here and select “Imagine: Plan Design Through the Lens of Financial Wellness.” And to view a pdf of the full 56-page issue, click here.

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