From the April 2016 issue of Investment Advisor • Subscribe!

How Financial Wellness Drives Better Retirement and Tax Decisions

Education is crucial to help retirement plan participants make the best tax choices

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Wellness programs can be more effective than traditional educational seminars in engaging participants. (Illustration: Ellen Weinstein) Wellness programs can be more effective than traditional educational seminars in engaging participants. (Illustration: Ellen Weinstein)

Retirement plan advisors don't typically spend the majority of their time focusing on taxes for participants. However, there are interrelated decisions around taxes that can impact a participant's retirement and the economics of the plan sponsor.

The issue we face as an industry is education, and the role that a plan sponsor plays in helping participants make informed decisions about their taxes today so that they maximize their income in retirement. Similarly, retirement plan advisors can educate plan sponsors on the economic impact of retirement plans and well-prepared participants — and conversely, ill-prepared participants.

There's a growing trend in the industry, and quite a few conversations happening at the Department of Labor, about how plan sponsors can help participants become better consumers of retirement plan benefits. Plan sponsors who commit to educating their people stand to benefit from retirement preparedness in the long run, but finding the right cocktail of education and motivation has proven to be tricky.

In the past 20 years, we’ve seen traditional seminar programs or “lunch and learn” offerings that have never truly been successful at making an impact on higher financial literacy. Though a participant may find a 40-minute session with an advisor in the company's cafeteria helpful, there's no real follow up. No relationship. No motivation to act or plan. Employees attend, discuss their taxes, their 401(k)s, their mortgages, etc., and then walk back to their desks where life takes over again.

Any advisor who works with a business, small or large, would agree that reaching every employee in a way that resonates with their individual situation is daunting. This is where today's financial wellness programs thrive.

Financial Wellness and Taxes

Financial wellness refers to educational programs that are aimed at making participants literate, though not experts, on their financial picture so that they can make informed decisions about their investments and retirement plan options.

Today's financial wellness programs are available on demand (thank you, technology!) and focus on taxation and retirement in a way that is convenient and engaging to the participant. They can learn at their own pace and choose from online topics that interest them. In some cases, a participant can even call a certified financial planner professional to get real-time information and educational content.

These are programs that plan sponsors can offer their employees to help them with budgeting, managing debt and saving for retirement, which all have an impact on their annual tax bill. Best of all, these programs are perceived by participants as an employee benefit, can help them save on taxes and, in the long run, can help a plan sponsor prepare their employees to retire with dignity.

Benefits for Plan Sponsors

Financial wellness programs are designed to help participants understand the interrelated nature of budgeting, debt and savings so that they can make better choices on their taxes. When good choices are made, participants may be able to save more than they thought toward retirement. Those increased savings through a reduced tax bill lead to positive outcomes for participants.

Positive outcomes for participants lead to more satisfied employees and, over the long term, reduced employee expenses for the plan sponsor, e.g., health insurance costs. In 2015, the Department of Labor estimated an annual benefits carrying cost of $22,000 per employee. If 80% of a plan sponsor's participants are ill-prepared for retirement and work three years beyond their planned retirement date, it can increase a plan sponsor's benefits cost by more than $1 million.

Another benefit offered by many plan sponsors is matching contributions, which can be deducted from sponsors’ taxes.

Benefits for Advisors

Advisors who work with businesses should research and identify financial wellness programs that help participants make the best decisions possible so that they can minimize their annual tax bill to positively impact savings. It's equally important that the advisor have a conversation with a plan sponsor — this is likely a CFO or someone in the finance organization — and help them understand the positive impacts of offering a 401(k) and employer match programs and the implications of both of these for the company's tax bill.

3 Tips for Advisors

  • Research financial wellness programs and talk to the plan sponsor about which offerings best suit their participants

  • Understand 401(k)s’ short-term impact on company tax burdens, longer-term implications of well-prepared participants and benefits to the company

  • Understand and internalize DOL fiduciary standards being discussed and their impact on retirement savings

Working with participants and sponsors makes the advisor more valuable and deepens the relationships. A financial wellness program that helps employees make good tax and retirement choices strengthens the relationship between the advisor and the participant as a potential client.

--- Read "5 Essential Tax Questions About IRAs, Rollovers and Retirement Plans" on ThinkAdvisor.

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