The U.S. pension industry has avoided a major shakeup posed by the potential “Rothification” of the tax rules around retirement savings, a pension expert said at an event in Toronto on Wednesday.
“For now, at least, we seem to be safe from Rothification,” Drew Carrington, U.S. head of institutional defined contribution at Franklin Templeton Investments Corp., told attendees at a conference at the Shangri-La hotel in Toronto.
Carrington, who was speaking about trends in the U.S. defined contribution pension plan industry, was referring to the ongoing debate over tax reform in that country. As U.S. legislators have been seeking revenue options to offset major tax cuts heralded by a Republican-dominated administration and Congress, one of the options floated has been to extend the Roth 401(k) approach, which provides for tax relief on retirement savings contributions upon withdrawal rather than an immediate deferral, to other types of plans.
“It’s just a timing question but it’s a huge change,” said Carrington, who was speaking at an event organized by Franklin Templeton.
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While the U.S. pension industry has avoided that shakeup, it continues to see the impact of changes made to pension legislation more than a decade ago, Carrington noted. Particularly notable has been the rise in automatic enrolment and escalation following regulatory reforms under the Pension Protection Act. While the changes did prompt an initial boost in plans using automatic features, the last year has since further significant increases, according to Carrington. “We’re not sure what’s driving that,” said Carrington, citing a significant rise in the last year in both automatic enrolment and escalation.
“It’s just remarkable the sort of step-change jump there,” he added.
Asked about whether high default contribution rates might cause plan members to pull back from their plans, Carrington said research has shown it’s not a big issue. “You can auto enrol people at 12 [per cent] and you won’t have any meaningful reduction in participation rates as opposed to enrolling them in at three,” he said.
As for other big trends, Carrington said overall financial wellness is a hot topic for the pension industry and plan sponsors.
“It’s a big deal,” he said, estimating two-thirds of plan sponsors are looking to roll out comprehensive financial wellness programs for their workers. Options include restructuring savings approaches to ensure employees having emergency funds before they start focusing on retirement. “It helps people stay out of short-term to high-cost debt,” said Carrington, noting assistance with student loan repayments is another big trend.
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“The company will pay a portion of the employee’s student loan directly,” he said, citing the benefits of increased employee retention and reduced financial stress.