Author: Laurie Rowley

How Icon Uses Behavioral Finance to Help You Successfully Save for Retirement

Posted on June 22, 2022 by Laurie Rowley - Retirement Benefits

Behavioral Finance might sound a little esoteric and perhaps like it’s a subject for grad school. But the question this scientific field tries to answer is actually quite simple: why do investors, even experienced ones, often make misguided choices? Icon uses the principles of Behavioral Finance to ensure its plan participants are successful in saving for retirement.

What Is Behavioral Finance?

Behavioral Finance is a field of study that was developed in the 1980’s and 1990’s in response to what experts thought were unpredictable moves in the stock market. At the time, the Efficient Market Hypothesis held that the stock market moves in predictable, rational ways because everyone has access to the same public information (and those that have access to insider information aren’t allowed to trade on said information).

But the stock market often moves in irregular or volatile ways so researchers wanted to find out why.

What Has Research Into Behavioral Finance Found?

In short, Behavioral Finance has found that the markets don’t always move in predictable, rational ways, because the people who are operating within those markets (i.e. the investors) are not always rational and predictable. Instead, they often let outside psychological influences affect their investment decisions.

Some of the phenomena researchers have found include:

Stocks with ticker symbols starting with an A, B, or C are traded more often and are thus considered more liquid than those with tickers starting with X, Y or Z.
Investors (even experienced ones) have a tendency to sell winners too quickly and hold losers too long. Presumably because the pain of losing is greater than the satisfaction of gains.
Most actively managed funds (i.e. those managed by a broker who decides which assets to buy and sell) don’t beat passively managed funds (i.e. those that are automatically rebalanced using an algorithm).

Reasons for this behavior include several biases:

Herd behavior: the instinct to act how others act.
Overconfident bias: you think you know more than you do.
Hindsight bias: you think what happened before will happen again.
Confirmation bias: you look for information that confirms what you already think is true.
Anchoring bias: basing your assessment of value on the numbers in your immediate vicinity. A real world example of this is: you live in an area with a high cost of living, so you think that everything costs more than it does (or should).

How Does Icon Use Behavioral Finance To Make You More Successful At Saving For Retirement?

Icon asks you a few questions to understand your financial situation. Then, we use an algorithm to determine the assets your portfolio should include. We use an algorithm to rebalance your portfolio regularly to ensure you always own the asset mix that makes sense for your financial goals and timeline.

Why do we use an algorithm? Because an algorithm doesn’t have psychological biases. It doesn’t favor stocks with tickers at the beginning of the alphabet or have hindsight bias.

We also don’t use jargon to influence your decisions. And we show gains and losses in true dollar amounts instead of percentages because it’s an easier way for people to understand the state of their portfolio.

At Icon, our goal is to help you save for retirement successfully. We don’t make money off of the sale of specific assets nor are we motivated by having as many assets under management as possible. We are simply motivated by closing the retirement savings gap because we believe everyone deserves a financially secure future.

Dreading That Form 5500? This Retirement Plan Doesn’t Require One.

Posted on June 13, 2022 by Laurie Rowley - Retirement Benefits

If you offer your employees an employer-sponsored retirement plan in the form of a 401k, a pension or another type of plan covered under ERISA, you’re coming up on your Form 5500 deadline. Unless you have a one-participant plan (either a sole proprietor or partnership plan) with total assets of $250,000 or less, filing the Form 5500 is a non-negotiable requirement to offer a 401k or similar plan. And it will likely require that you allocate resources (time, money and talent) to ensure it’s completed properly.

What is a Form 5500?

Form 5500 is a form issued by the Department of Labor (DOL) on which employers who offer 401ks and other ERISA-covered plans report on their plan’s performance, financial condition, operations and management. These results are then distributed to plan participants.

There are three types of Form 5500:

The “Regular” Form 5500: If your plan has 100 or more participants, you’ll have to complete this version.
The “Short” Form 5500: This version is for companies that have fewer than 100 participants in their plan.
The “One Participant” Form 5500: If your plan covers one participant and their spouse, and you’re required by ERISA rules to file a Form 5500, this is the version you will use.

Why Do Employers Have to File a Form 5500?

The federal government uses Form 5500 in two ways. First, it helps to ensure that employer-sponsored plans are being operated and managed in a way that is in the best interest of the plan participants (i.e. the employer is fulfilling its fiduciary responsibilities). Second, the DOL, Congress and other federal agencies and private organizations use it to inform them on employee benefits, tax and economic trends and policies.

Form 5500 Deadline

Your deadline to file your Form 5500 is seven months after the end of the plan year. If your retirement plan operates on a calendar year, then your deadline is July 31st. Penalties for missing the deadline are $250 a day up to a maximum penalty of $150,000.

The Form 5500 is one of the many annual administrative duties employers must fulfill when they offer a 401k or similar type of retirement savings plan. But what if we told you there was another option that didn’t require filing a Form 5500, or any other form of documentation with the IRS or Department of Labor (unless you’re offering a plan to comply with a state mandate)? There is. It’s an Icon payroll deduction IRA.

Payroll Deduction IRA: The Simplest Way to Offer a Retirement Plan

Even the IRS will tell you that, “a payroll deduction IRA is probably the simplest retirement arrangement that a business can have.” This is why:

A business of any size (even the self-employed) can offer a payroll deduction IRA.
No plan documents are required (unlike the plan document you must maintain under a 401k arrangement).
The employer has no Form 5500 filing requirements, unless required by a state retirement mandate.
Employers’ only responsibilities are to approve the payroll deductions and provide employee information to plan administrators.
No statements need to be provided to employees.
Only employees make the contributions.
Employees’ contributions might be eligible for the Saver’s Credit.
Employees are always 100% vested.

How Icon Makes a Payroll Deduction IRA Even Better

Icon leverages technology to administer our plan so we can offer flat, transparent pricing. We handle all employee onboarding, communication and investment management. We offer customer support in real-time and provide employers with a streamlined dashboard for the minimal tasks they need to perform and employees with an app for easy plan management.

Finally, A Retirement Plan for the Self Employed

Posted on May 20, 2022 by Laurie Rowley - Retirement Planning

Of the more than 150 million workers in the U.S.,16 million identify as self-employed. That means more than 10% of the working population doesn’t even have the option for an employer-sponsored retirement savings plan. Until now.

What is a Retirement Plan for the Self-Employed?

A retirement plan for the self-employed is a way for people who work for themselves to receive tax benefits for saving for retirement. Previously, this was only available to either employees of companies that offered 401ks or workers who navigated the complicated, and sometimes expensive process of opening another type retirement savings account with a financial institution.

Now, self-employed workers can participate in a retirement plan that is easy to manage, inexpensive and portable. So they never lose access or the ability to contribute to their account, they’ll never need to complete an expensive rollover and they’ll never again experience a lapse in coverage.

Icon is the Ideal Retirement Plan for the Self-Employed

Whether you work for yourself as a sole proprietor or individual contractor, or you have employees, Icon is the ideal retirement plan for you. As a self-employed worker, you don’t have a lot of time and financial resources to manage and administer a retirement plan. And high fees will eat into your savings, which in some cases, could force you to delay retirement. You need something that’s simple to manage, inexpensive to maintain and helps to build your financial security in retirement.

That’s where Icon comes in. You can set up your Icon account in minutes, you receive guided portfolio options based on your answers to a short survey and the low, flat fees allow you to retain as much of your savings as possible. This allows them to grow faster because of compound interest. If you choose to hire employees in the future, there’s no need to switch plans.

Details You Should Know

Contributions to Icon’s IRA are typically tax-deductible in the year they’re made. Distributions made in retirement are subject to the appropriate income tax rate.
The annual contribution amount for 2022 is $6,000 for workers under the age of 50, with an additional $1,000 allowed if you’re aged 50+.
You always have access to your account and as long as you earn money, you can contribute to it.
Your contributions to your Icon account aren’t considered a business expense.
Both you and your spouse can open an Icon account as long as you both earn money.
You can roll your old retirement accounts into your Icon account.

No, You Don’t Need a 401k Calculator

Posted on May 20, 2022 by Laurie Rowley - Retirement Planning

Developing a plan to save for retirement can feel daunting. The idea is basic enough: set aside money each month or year, invest it, then use it once you retire. But how much you should set aside and where you should invest it and through which vehicle (e.g. IRA, 401k, etc.), to ensure you’ll have enough money in your golden years is complicated. And the answers change constantly depending on your financial and employment situations.

That’s why 401k calculators are functionally useless.

What is a 401k Calculator?

A 401k calculator is a tool that many financial institutions provide to show you how much you should be saving each month in order to reach a certain retirement goal. It usually takes into account basic inputs like:

Your age,
Your 401k balance (if any),
Annual income,
Percent contribution,
Employer matching,
Retirement age,
Average rate of return,
Investment fees as a percent. Note: they typically leave out administrative fees which can be substantial.

Then the calculator will spit out a combination of the following predictions:

Your monthly costs in retirement,
Your 401k balance when you retire,
How much of your monthly costs your 401k will cover, and sometimes
How much you’ll pay in fees over the course of your working life.

What a 401k Calculator Actually Shows You

You might look at the above list, and think, “That’s useful information.” And it is in the sense that it’ll give you a basic idea of what happens to your savings as you continue to contribute and invest it in the market, and just how far fees can erode your savings. But here’s the hard truth: a 401k calculator is only a snapshot of what your retirement savings journey looks like right now using a standardized set of assumptions.

For instance, you might live in a high cost of living state during retirement, in that case you might need more per month in living expenses than the calculator predicts. Conversely, you might own your home outright and have very low monthly expenses at retirement. It also doesn’t take into account any other investments you might make over the course of your working life or health issues you could develop that need managing. So the calculator’s predictions can only give you a vague, general idea of what your financial situation in retirement could, potentially, maybe look like if everything stayed exactly the same as it is right now.

We don’t have to tell you that this is an unrealistic expectation because, to quote the Greek philosopher, Heraclitus, “Change is the only constant in life.” As you earn raises, suffer unemployment, experience highs and lows in the market, change employers and your contribution percentage, change investment portfolios or perhaps roll your savings into a different savings vehicle, that original snapshot becomes outdated and therefore, irrelevant.

What’s Better than a 401k Calculator? Understanding How Compounding Affects Your Balance

The important thing to understand about saving for retirement is: the more you save (and the earlier you start), the more you earn in the market because of something called “compounding”. Compounding is what happens when the interest you earn on your principal contributions earns interest.The more frequently your money compounds, the faster it grows without any additional contributions.

It’s all about compound interest. Use the slider to see how what you set aside today can grow over time.

$1 Yearly Max

What you set aside today

Adds up over time with compound interest*

Another Important Thing to Understand: High Fees Erode Savings Quickly

Employer sponsored retirement savings plans are often subject to two types of fees: investment fees and administrative fees. Investment fees are what the financial institution charges for managing your portfolio of investments. The average investment fee ranges from 0.58% to 1.2% of the portfolio balance, depending on the type of fund you’re invested in.

In addition to investment fees, employers typically pass on the cost of managing the plan (i.e. administrative fees) to account holders. The administrative fees charged to individual account holders will depend on the employer, the financial institution investing the retirement plan, the company that’s actually managing the plan (this could be the employer, the financial institution or a third party), and the portfolio the savings account is invested in.

How Do I Make Sure I’m Saving Enough?

There are a few different philosophies out there and each espouses a different ideal budget percent allocation. What some people do is, take your total monthly take-home pay for your household (for 1099 employees, this is your gross pay net of taxes, for W-2 employees, this is your paycheck), and allocate the money accordingly:

70% for expenditures (needs + wants)
20% for saving (retirement savings and saving for big purchases like a house)
10% for your emergency fund (for unexpected crises like unemployment or a medical emergency), debt repayment or donations

This isn’t a hard and fast rule and your actual percentages will likely fluctuate depending on your current circumstances. But aiming to save some of your income is a good way to build financial health and ensure that you’ll not only be taken care of in retirement, but in a crisis as well.

5 Things You Need to Know Before CalSavers’ June Deadline

Posted on April 26, 2022 by Laurie Rowley - Retirement Benefits

If you’re an employer of California residents, you’re probably keenly aware of the June 30th CalSavers deadline. It might have you scrambling to set up your workplace retirement savings plan, or maybe you’re ahead of the curve and already have a plan in place. Either way, there are 5 things you need to know as this all-important date approaches.

1. The CalSavers deadline most likely applies to you. Over the past couple of years, the state of California has been gradually lowering the employee threshold at which it requires employers to offer a workplace retirement plan. If you have more than 100 employees, your deadline was September 2020; more than 50 employees, your deadline was June 2021 and now, if you have 5 or more California employees, your deadline to offer a retirement savings plan to your people is June 30th of this year. The mandate applies as long as at least one of your employees is 18 years of age or older

2. CalSavers is only for California-based employees. If you are one of the many companies that saw their workforce scatter during the pandemic, you have a choice to make. You can set up state-based retirement savings plans in every state in which you both have employees and one is available and required. Or, you can find a singular solution in the private market, like Icon.

3. There are financial penalties for not complying with the June CalSavers deadline. If you haven’t set up a workplace retirement savings plan for your California employees within 90 days of the June 30th deadline, you will be assessed a fine of $250 per eligible California employee. If you still haven’t enrolled your company in a plan by 180 days after the June deadline, you will be assessed an additional $500 per eligible employee.

California employees are considered eligible if they are: 1) Age 18 or older and 2) considered an employee under California law. The number of hours worked per week or their tenure is not a factor into their eligibility. You must upload all employee information to the CalSavers website within 30 days of their start date. Employees will then be automatically enrolled in the program if they do not opt out within 30 days thereafter.

While California law doesn’t require that you offer a workplace retirement plan to 1099 workers, Icon’s savings plan gives you that ability. With Icon, all workers, regardless of status, have the opportunity to save for retirement through automatic payroll deductions

4. CalSavers accounts have default settings that may not benefit all employees.

The default account type is a Roth IRA. The default account type for CalSavers accounts is a Roth IRA which carries with it income limits based on tax filing status. In 2022, those limits are: $214,000 for a married couple filing jointly and $144,000 for single filers. If account holders earn above the income limit, they aren’t eligible to contribute to a Roth IRA and if they do so, they will have to unwind their contributions.

Account holders pay income taxes on Roth IRA contributions (although they don’t pay income taxes on the distributions they take later).

Account holders have the option to change their account type to a Traditional IRA, but they must take it upon themselves to do so.

The default savings rate is 5%. Unless account holders designate a different contribution rate, 5% of their paycheck will be automatically deposited into their CalSavers account. Some workers may not be able to afford a 5% contribution and will thus be unpleasantly surprised if they’re not made aware of this default setting.

Employees are automatically enrolled in the CalSavers retirement plan. California law states that employers must automatically enroll all eligible employees in the CalSavers program (if that’s the company’s chosen retirement plan). Employees must then take it upon themselves to opt-out if they don’t want to participate. This could leave some employees feeling like it’s a hassle to manage their account or it could take them by surprise should they either forget to opt-out.

5. Think a private market retirement savings program is a better fit for your company? You can un-enroll your company from CalSavers. If you signed up for CalSavers ahead of the June 30 deadline but you now see you have better options, you can unenroll from the program. You just need to contact CalSavers directly and they can help you through the process.

Icon is helping small and mid-sized companies to both comply with California law and offer their employees an easy and inexpensive way to save for retirement. The initial set-up for both employers and employees takes minutes, then Icon takes care of the rest. We handle employee education, investment management, communication with your payroll service, and we carry the fiduciary responsibility to the employees so all you have to do is upload employee information and approve their contributions. Icon is the easiest, quickest, and most affordable way to comply with the California June 30th deadline.

The Saver’s Tax Credit Is The Ultimate Retirement Savings Incentive

Posted on April 11, 2022 by Laurie Rowley - Retirement Planning

For some people, allocating even a small amount of their monthly budget for retirement is difficult. That’s where the Saver’s Tax Credit comes in. It rewards you for making retirement account contributions by giving you a dollar-for-dollar break on your tax bill, doubling the retirement savings incentive.

What is the Saver’s Tax Credit?

The Saver’s Tax Credit is a tax break the IRS gives to low and moderate income taxpayers who make contributions to their retirement accounts. The tax break is a dollar-for-dollar reduction in your tax liability based on how much you’ve contributed, your adjusted gross income (AGI), your tax filing status and a couple of other factors.

It’s important to note that this is not a tax refund. It’s a subtraction from your tax bill. That means if you owed $1,000 in income taxes for the year, and your tax credit was $500, you would still owe $500 in income taxes. In this scenario, the Saver’s Tax Credit could still result in a tax refund if, over the course of the year, you paid more than $500 in taxes. If that was the case, you would receive the difference between what you paid and what you owe in the form of a tax refund.

Who is Eligible for the Saver’s Tax Credit?

To be eligible for the Saver’s Tax Credit you must:

Be at least 18 years of age by the end of the tax year.
Not be a full-time student.
Not be claimed as a dependent on someone else’s taxes.
Pay income taxes.
Have an AGI that falls within the IRS guidelines.
Have contributed to a qualifying retirement account.

The following are the types of accounts which qualify for this retirement savings incentive:

Traditional and Roth IRA
401(k)
403(b)
SIMPLE
SEP
Government issued 457
SARSEP
501(c)(18)(D)
ABLE

How Do I Calculate my Savers Tax Credit?

The amount of the credit you can receive depends on your adjusted gross income (AGI). The credit can be 50%, 20%, or 10% of your contributions to a retirement plan or IRA, up to $2,000 if filing single or $4,000 if married and filing jointly.

For 2022, the adjusted gross income (AGI) eligibility requirements for the Saver’s Tax Credit are:

*Credit Rate*	*Married Filing Jointly*	*Head of Household*	All Other Filers*
50% of your contribution	AGI not more than $41,000	AGI not more than $30,750	AGI not more than $20,500
20% of your contribution	$41,001- $44,000	$30,751 – $33,000	$20,501 – $22,000
10% of your contribution	$44,001 – $68,000	$33,001 – $51,000	$22,001 – $34,000
0% of your contribution	more than $68,000	more than $51,000	more than $34,000

*Single, married filing separately, or qualifying widow(er)

When determining your annual contribution amount the following are excluded for the purposes of the Saver’s Tax Credit calculation:

Rollover contributions.
Any distributions you’ve taken during that tax year.
Any contributions made that were in excess of the annual limit.

Here is an example:

Dylon earns $32,000 in 2022 and contributes $1,000 to her Icon account. When filing her taxes, assuming Dylon doesn’t have any other write-offs, her AGI is $31,000 and it qualifies her to claim a Savers Tax Credit of $100 (10% of her $1,000 annual contribution).

Why You Should Claim this Retirement Savings Incentive

Claiming your Savers Tax Credit is as easy as filling out Form 8880 and submitting it along with your income tax filing. And doing so doubles the retirement savings incentive. Most retirement savings plan contributions result in a tax exemption in the year they’re made, which reduces the amount of income on which income taxes are assessed. By claiming the credit, you can reduce your tax liabilities dollar-for-dollar by the credited amount.

Why Don’t 81 Million Americans Have A Retirement Plan?

Posted on March 30, 2022 by Laurie Rowley - Retirement Benefits

The retirement industry is complicated, outdated, and serves a workforce that no longer exists. Originally created to replace the pension system, the 401k was intended to provide employees who worked for the same company, for the majority of their career, a way to save for retirement.

But, in the forty-plus years since 401k plans were created, the workforce has changed in dramatic ways. Today, people are mobile and will have an average of 12 jobs throughout their career. Many companies are also making a strategic shift toward keeping their workforce independent contractors as a way to keep costs down. These shifts in the workforce require a parallel shift in how people access retirement plans.

Or else we’ll all pay the price.

The Harrowing Stats

Almost 36% of Americans have never had a retirement account. Not because they don’t want one, but because most of them don’t have access to a workplace retirement plan (e.g., a 401k). This problem is going to get worse as more and more people choose to work for themselves and/or become independent contractors. In fact, 86.5 million workers are predicted to be self-employed by 2027 (Statista). None of whom is eligible to contribute to a 401k.
In 2020 there were 147.79 million people employed in the U.S. and only 60 million of those participated in a 401k. That’s 40% of the workforce.
About 50% of women and 47% of men aged 55 to 66 have no personal retirement savings.
Only 22% of women have $100,000 in savings or more, which is worrisome when healthcare alone is expected to cost the average 65 year old $300,000 in retirement.
The annual contribution limit for an IRA (the only type of retirement savings vehicle available to everyone, regardless of their type of employment) is $6,000 (an additional $1,000 is allowed for those age 55 and older). Compare this to the $20,500 limit for 401ks for 2022 (with a $6,500 catch-up allowed for 55 older), and you see that even if these workers open their own retirement savings account, it’s difficult for them to save the amount they’ll need for retirement.

The current system that relies on 401ks as the preferred vehicle for retirement savings isn’t working.

What Makes 401ks Outdated for the Modern Workforce?

Lack of portability. The 401k is set up and sponsored by the employer, which means once someone leaves the company, they’re no longer eligible to contribute to their plan. They must either roll their previous employer’s plan into a new one (which could be costly, if it’s even allowed), manage multiple plans, abandon the account, or cash out.

Today, people spend between 2 and 8 years at a job , which means that 15 million people change jobs each year. That’s 15 million people who are forced to make potentially damaging decisions about their financial future because of the way the 401k is structured.

Unfair eligibility leaves a lot of people out. The 401k system is restrictive when it comes to who is qualified to participate. Typically, to “qualify” for a 401k, you must be a full-time employee who has worked for your employer for a certain time period. If you’re a part-time employee you’re only eligible to participate if you book between 500 and 999 hours with your employer over a consecutive two-year period. If you’re an independent contractor, you’re not eligible at all. Even if you work 40 hours a week or more for the company.

If you’re an employer, surprise, you’re a fiduciary. Over the past decade, several high-profile lawsuits have brought an increased level of attention to employer’s legal responsibilities in offering 401k plans. This is because employers become fiduciaries when they sponsor plans. They are responsible for ensuring the plans are fair, managed in the best interests of plan participants and in compliance with ERISA guidelines. Even if the 401k provider takes on some fiduciary responsibilities, the employer always remains a fiduciary, as well.

Due to these liabilities, risks, and costs, many employers would like to remove themselves from the responsibility of being a fiduciary to their employees’ retirement savings.

Antiquated technology. Much of the technology the 401k industry uses is shockingly outdated. This is worrisome. These behemoth systems create massive inefficiencies that result in high fees that are passed on to plan participants, which erodes their life savings. In addition, outdated technology makes the process of saving cumbersome and out-of-step with other consumer experiences. Today’s customers expect products to be easy to use, accessible, personalized, and fairly priced.

Fees, fees, and more fees. Today, high fees are costing people billions of dollars in lost savings. This is especially true for those who work for small to medium companies. Sadly, smaller companies pay much higher 401k fees because they don’t have the negotiating leverage of larger companies.

The Solution is Portable Retirement.

The last decade has brought rapid innovation to banking, payment processing, and systems integration. These new technologies provide the components required to build an alternative retirement savings architecture that serves the needs of the evolving workforce.

Beyond technology, there are other design and product features required for a modern retirement savings plan including: low (transparent) fees, high quality funds, universal accessibility, holistic financial education, and support with personal finances.

Icon. The modern retirement plan.

Built by industry experts in behavioral finance, technology, and design thinking, Icon is an entirely new approach.

Icon eliminates the regulations, costs, and risks for employers, and completely redefines the employer’s role. Icon is the simplest way to offer a retirement plan.

It gives people the freedom and flexibility to save in a low-cost, easy-to-use, tax-deferred savings plan. And, unlike a 401k plan, there are no limits on who can use it. Everyone qualifies: full-time, part-time, independent contractors, gig workers.

And for the millions who work for themselves, Icon can help them achieve financial security through a structured, self-directed, and flexible retirement savings plan.

The Easiest Way to Offer a Retirement Plan

Posted on March 23, 2022 by Laurie Rowley - Retirement Benefits

If you’re reading this article it’s probably because you’ve tried to offer a 401k retirement plan and found it to be complicated, confusing, and expensive. With a payroll IRA, small and medium businesses now have an easy way to offer their employees a retirement savings plan without the cost, risk, and complexity of a 401k. No matter what your setup, whether you have all W2 employees, all 1099 workers or a mixture of both, a payroll IRA is the easiest way to offer the people on your payroll a retirement savings plan.

Payroll IRAs are Easy to Set-up and Administer

With a payroll IRA, employers get a “plug-and-play” retirement benefits solution that’s low cost, low risk and, because of its utilization of new technology, incredibly easy to use for employees and employers alike. Icon is a full service, payroll IRA with live customer support, employer and employee onboarding, employee communication, and an easy-to-use dashboard.

With Icon, employers complete minimal paperwork for initial plan set-up and then you send us your payroll information and we take care of the rest. This includes:

Employee onboarding and education,
Communication with your payroll service,
Plan management, and
Employee removal upon departure from the company.

Once you’ve activated your plan, your employees choose whether or not they want to participate and how much they want to contribute (up to the annual maximum). The only thing you have to do as the employer is approve employees’ contribution amounts.

Payroll IRAs Solve 3 Big Benefits Problems for Employers

First, a payroll IRA satisfies the need to offer all employees a retirement benefit. There’s no need to distinguish between different employee classes or to figure out vesting schedules, because all employees are eligible to participate in a payroll IRA and they’re immediately 100% vested.

Second, it allows employers to offer a retirement benefit without the cost and risk of carrying a 401k plan. With Icon’s payroll deduction IRA, we maintain the fiduciary liability of managing the plan, there are no annual reporting requirements, and no ERISA or nondiscrimination rules to worry about. Icon charges a flat monthly fee based on your company size. Icon is so much more affordable than a 401k plan because we leverage new technology to keep our costs down. The 401k industry is still very paper-intensive and requires a lot of manual plan management, so they tend to charge employers and employees a lot more for their services.

Third, employers have more flexibility in terms of how you reward employees for saving. Instead of a complicated formula used in 401k plans, you can have full discretion on what you give your employees (if anything) through a financial wellness bonus.

Why We Need to Raise the Annual IRA Contribution Limit

Posted on March 7, 2022 by Laurie Rowley - Retirement Benefits

The U.S. is facing a retirement savings crisis of its own making. Not only are people not saving enough to live on in retirement (36% of people recently surveyed think they’ll run out of money in their later years), over half the workforce doesn’t even have access to a workplace retirement plan, and 25% of U.S. working adults have zero retirement savings or pensions. If nothing changes, if we don’t provide people with greater access to retirement savings vehicles, we, as a society, are going to be paying for it later. Both in the form of social services needed and lost productivity and lower spending (the fuel of our economy) due to children caring for their parents.

How Did We Get Here?

The nature of work has been steadily changing over the past 20 years but our approach to retirement savings has not. The 401k was created in the 1970’s when people worked for big companies for decades and was meant to replace the pension system. It was never meant to be portable or easily changed. It was meant to be set up once and most of the control over investments remained with the employer.

Now, people work for an average of 12 companies as a full time employee over the course of their career. If they’re offered a 401k at every job (and that’s a big “if” since 61 million people work for SMBs, most of which don’t offer retirement plans), that means they will either have to manage 12 retirement accounts, complete 11 rollovers, or cash out which comes with onerous tax penalties. Many people just end up abandoning their account.

People are also more likely to not work as a full time employee at all. As of January 2021, there were roughly 57.3 million independent contractors in the U.S. and that number is expected to grow to half the workforce over the next five years and none of these people are even eligible to contribute to a 401k.

So the 401k isn’t user-friendly for those who have access to one, and it won’t even be available to over half the population (if you count the millions of people who work for small and medium businesses who can’t afford to offer a 401k to their employees), and yet current regulations favor it as the preferred retirement savings vehicle.

The Problem: Annual Contribution Limits

If you either don’t have access to a 401k or aren’t eligible for one, an Individual Retirement Account (IRA) is your only retirement savings vehicle. This would be fine since IRAs are portable, tend to charge lower rates and are otherwise better suited to the modern work environment. Except for one thing: the annual contribution limit.

Current regulations state that IRA participants can only contribute up to $6,000 a year to their account (an extra $1,000 is allowed if you’re 50 or older), and part of your contributions might not be tax-deductible, depending on your income, filing status and whether or not you or your spouse have a 401k. Compare this to the $20,500 in annual tax-deductible contributions allowed to a 401k (an additional $6,500 allowed for those aged 50 or older), and you see the current regulations are setting up a two-tiered retirement system.

Why do we have these laws? Outdated thinking. There is an assumption that contract workers are more likely to be women and can thus, “fall back on their husband’s 401k,” is both factually untrue (men outnumber women as full time independent contractors 3:2), and sexist. No one should be dependent on having a spouse with a 401k to retire with dignity.

Another assumption is that 1099 workers are low-wage earners and thus wouldn’t be able to save more than $6,000 a year. This is also factually untrue. In fact, 1099 workers are most likely to be in the high paying fields of technology and professional services.

The Solution: Level the Playing Field

Independent contractors are already treated unfavorably in the tax system. They must pay higher taxes because IRS rules state they must pay Social Security and Medicare taxes as both an employer and employee (full time employees split these taxes with their employer) and business taxes. On top of this, they don’t qualify to receive workman’s comp, unemployment benefits or FMLA.

By keeping the contribution limit for IRAs at $6,000, regulators are further hamstringing the ability of these workers to create financial stability for themselves and their families. The solution is to raise the annual IRA contribution to match what’s allowed for 401ks so that all workers have a shot at creating the nest egg they’ll need when they eventually retire. This is not only the right thing to do morally for our aging population, but it’s the right thing to do for our economy.

Retirement Plan Matching Isn’t Always What it Seems

Posted on February 10, 2022 by Laurie Rowley - Retirement Benefits

You want to attract the best talent possible and you want to keep your current employees happy, so you put together the best compensation package you can. You might think a 401k with employer matching is an essential part of that package. But it turns out a financial wellness bonus might be more attractive (and beneficial) to your workforce. Here’s why.

What is Employer Retirement Contribution Matching?

Employer retirement contribution matching is when an employer offers to match employees’ retirement plan contributions up to a certain percentage of their annual salary. Employer matching can be structured differently at different companies but here are the three most common ways it functions:

Simple Match. With simple matching, the employer matches employee contributions up to a fixed percentage of the employees’ annual salary. Example: Employer matches 50% of employees’ contributions up to 6% of their annual salary, meaning the employer will contribute a maximum of 3% of the employees’ annual salary each year.
Tiered Match Formula. If you offer this type of matching structure, you match different levels of contributions at different rates. For example, you might match 100% of employees contributions up to 4% of their salary and then match 50% of their contributions up to the next 2% of their salary (for a total max matched contribution amount of 5% of their annual salary).
Max Dollar Match. In this type of structure, employers match employees’ contributions up to a certain dollar threshold. For example, an employer might match 50% of employee contributions up to $1,000.

A less common employer retirement plan contribution structure is a blanket contribution to employees’ accounts regardless of employee contribution activity. Meaning, every employee would get the same retirement plan contribution from the company (this might be a dollar amount or percentage of annual salary) regardless of whether or not they contributed even $1 of their own money.

The Pros and Cons of Employer Retirement Plan Matching

Pro #1: Employees tend to save more.

A recent study conducted by Brightscope and the Investment Company Institute (ICI) found that employees whose employers offered at least some level of contribution matching, ended up contributing more of their own money to their retirement account. The more money people save, the greater the employer match, and the faster those savings grow over time.

Pro #2: It can be a good recruiting tool. The general perception of retirement plan contribution matching is positive (people see it as “free money”), so employers can use this benefit to attract and retain talent. If the matching is on a vesting schedule, this can also incentivize employees to stay at the company longer than they might normally in order to leave with 100% of their employer-contributed savings.

Con #1: Employer contributions might not be available to employees right away. Many employers require employees to work for the company for a year before they’re eligible for contribution matching. If employer contributions are on a vesting schedule, then employees don’t fully own said contributions until the vesting is complete. That means if your vesting schedule is five years, every year an employee works for the company they own an additional 20% of the employer contributions. So if they stay with the company for two years, 40% of their company’s contributions are “released” into their 401k upon their departure.

Con #2: Employer matching can lead to a lack of portability of retirement savings. As we said above, employees whose employers offer retirement plan contribution matching tend to save more. Which is great. However, 401k savings aren’t portable. So when an employee leaves the company, they no longer have the ability to contribute to the account. They must either roll it over to a new retirement account (and the fees for doing so could wipe out any gains made), leave it where it is and keep track of it along with any other accounts they have, or cash it out and pay a hefty penalty.

Con #3: It can reduce employers’ flexibility when it comes to compensation. When employers put together their 401k plan, they must announce their intended employee contribution matching structure. This structure must be the same for all eligible employees. That means employers have limited flexibility in terms of the types of compensation they can offer employees and the way they reward good work product and valuable contributions to the company.

How Icon can Help Solve the Problems with Employer Retirement Plan Matching

Icon’s retirement plan is a payroll IRA meaning contributions are made through payroll. So by offering an Icon plan instead of a 401k, employers make it easy for employees to save while solving the portability problem.

As a reward for contributing to their account, employers can offer matching in the form of a “financial wellness” bonus. This is actually a more popular form of compensation as 55% of current 401k participants would rather have a cash bonus as opposed to employer matching.

Whether you’re weighing the benefits of employer retirement plan matching as an employer or as a current or potential employee, it’s important to consider all aspects of the 401k before making your decision.