Posted: November 01, 2009
Wealth Management: Incentives and mandates
Small-business owners, wealth planners weigh Obama's proposalsBy David Lewis
From the investor's standpoint, the Obama administration's tweaks, plans and proposals for changes to wealth management/financial planning/savings might seem a tad tepid.
From the entrepreneur's point of view, the potential voluntary measures also appear non-dramatic. The administration's proposed mandates, however, seem designed to make small businesspeople mad, as in angry, and also mad, as in crazed.
Over here, we have a background of a still-troubled financial sector, crumbled 401(k)s and IRAs, rising unemployment, the looming disintegration of Social Security, Medicare and Medicaid, and an on-the-books federal deficit the size of the Orion Nebula.
Over there, we have a foreground of a few likely additions to the financial planning repertoire: giving >> businesses the option of making 401(k) contributions an opt-out process rather than an opt-in; permitting workers to toss leftover vacation and sick time into the pension pot; and, most lukewarm of all, you can have your tax refund come back to you as a government savings bond.
Plus a couple of more serious options under congressional consideration, which we'll get to in a moment.
"It's all kind of ho-hum," says Wayne Farlow, founder of Westminster-based Financial Abundance LLC and a ColoradoBiz columnist. "Frankly I don't find it all to be very exciting, but it's out there."
Savings bonds? "It's for people who are really scared or people who have a really hard time saving. Nothing to write home about," Farlow says.
The vacation- and sick-time idea, so far also an option for businesses, obviously would sound brilliant to an employee, and just as clearly could seem exorbitantly expensive to some employers.
"If it's such a good idea and would really help the employee, then a group of businesses could just form an alliance to enact that voluntarily in their own businesses and theoretically they could attract the best employees," says Jeff Nabers, CEO of the Denver-based Nabers Group. "In reality, it's probably a mediocre idea at best, and that's why it hasn't happened."
Back to automatic opt-in, which has been studied and discussed for a long time, and which has bipartisan support in Washington.
The idea seems sensible, and actually had been proposed by the Bush Administration. Under it, employees would have 90 days to tell their bosses they don't want to participate in the company 401(k) plan. If they don't, they could still withdraw from the plan, but their contributions would remain in their 401(k).
"There have been a lot of studies done in terms of the efficacy of opt-in versus opt-out," says Wally Obermeyer, president of Aspen- and Denver-based Obermeyer Asset Management Co. "Does having an automatic opt-in make sense? Anything you can do to help people save more has to have a huge impact."
Melissa Montgomery-Fitzsimmons, wealth planning director for Denver-based First Western Trust Bank, agrees - with a caveat.
"Any program that makes it easier for people to save is a good idea. But the program falls short in that the only employers and employees who will benefit from this are those who already have retirement plans set up," she says. "It would make it pretty easy to modify their existing plans to include this opt-in provision. But it doesn't help employers who don't have retirement plans set up yet."
Two proposals - at press-time languishing in Congress - would take a more profound whack at incentivized savings plans. One would use a carrot; one would employ a massive, complicated, doubtless costly government bureaucracy.
"Another piece of legislation Obama included in his budget proposal would encourage employers to set up new plans," Montgomery-Fitzsimmons says. "It would make it very easy for employers to set up retirement plans, to streamline the administrative costs, to help with the ongoing record-keeping. About half the small businesses out there don't provide retirement plans for their employees, and the reason is they're difficult to administer, and they get expensive. If the legislation can be passed to make that whole process easier and more cost-effective we'll have much greater participation from the employers."
Then there's the potential bombshell: President and Nobel Prize winner Barack Obama's proposal, also embedded in his administration's budget request, for a mandatory government-run 401(k)-IRA plan.
"What it comes down to is, they have historically tried to put carrots out there, giving tax credits, things like that, yet that has not really lifted the needle. Now they are saying, ‘Enough carrots; now we have to use the stick,'" says Mark Gutrich, president of Denver-based ePlan Services, which establishes and administers 401(k)s for small businesses.
"The stick is, in the Obama scenario, he's going to create a payroll-deduct IRA program in which the funding would be similar to Social Security, but it would be a stand-alone additional tax - put it that way - where every employee would put in 3 percent of his or her pay toward the plan," an idea similar to a British program mandated last year, Gutrich says.
Employers that sponsor a 401(k) would be exempt from the mandatory program. However, employers would be required to automatically enroll all their employees.
"Not only would every business owner have to set up a payroll-deduct IRA program, but they would have to auto-enroll all their employees," Gutrich says. "Today they're not talking about mandatory employer contributions, but I don't think that's far-fetched. "
A mandated matching formula probably would "use existing tax structures to mandate that employers either have to put in 2 percent of payroll and not elect a contribution annually, or have to match dollar-for-dollar what an employee puts in," he adds.
This concept seems a bit much to most financial planners and advisers.
"Providing incentives works better than requiring a mandate. Companies in our capitalistic society respond very well to tax incentives and things that make their lives easier as opposed to instituting this new regulatory body and another set of guidelines that they have to understand and comply with. That seems much more heavy-handed. Perhaps that may be necessary, but the better approach is to provide the carrot as opposed to the stick," Montgomery-Fitzsimmons says.
To some financial advisers, making 401(k)s mandatory literally strains belief. "I can't imagine that's something that could be passed. That's pushing too much at the small-business owner, although we have a 401(k) for our employees, and I know even many of our independent advisers have 401(k)s," says Russ Diachok, president and CEO of Denver-based Geneos Wealth Management.
Most financial advisers and planners say they have weightier matters in mind than these proposals, anyway.
"What concerns me and my clients the most is the massive government spending that's going on right now, and the implications that has for the strength of the dollar in the long term and potentially to inflation in the medium to long term," Farlow says.
Some object to imposing a big government program on top of an already teetering financial system.
"It's not like people in 401(k)s lost money and people that invested in the Wall Street system didn't lose money," Nabers says. "It wasn't a 401(k) problem; it was a stock market problem. It's completely misdirected to get more people to participate in a fraudulent system. The 401(k)s have nothing to do with the problem."
One consequence of the financial industry cliffhanger has been a serious shakeout in the financial services industries. In the longer run, that could be good, some planners argue.
"Consumers have started to question the sensibility of following financial advice," Obermeyer says. "The consumer is more jaded, and probably appropriately so. If anything good came out of the Madoff scandal it is that the consumer is asking more, ‘Who can I trust?'"
David Lewis is a freelance writer based in Denver.