401(k) credit may need nudge from advisors and CPAs

Despite the growing tax benefits for small businesses to launch retirement plans and recent federal nudges to save, tens of millions of American workers still lack 401(k) plans.

Processing Content

Last week, President Donald Trump issued an executive order to start a TrumpIRA.gov website ahead of the 2027 implementation of the “saver’s match,” a provision of the Secure Act 2.0. That initiative would join the expanded tax credits for small business 401(k) plans as two of the most recent efforts by the federal government to encourage retirement savings. However, an earlier version of the savings program and the tax incentives for small business 401(k) plans have failed to garner much participation from workers or employers.

In fact, the expansions through the two Secure Acts of federal tax credits for start-up costs and initial matching contributions for small businesses that start retirement plans have only boosted participation among the eligible companies to 7.2% per year from 1.1%, according to a working academic research paper revised in March. 

The low participation points to the need for better collaboration between financial advisors and certified public accountants who work with business owners, according to two executives from Integrated Partners, a Boston-based hybrid registered investment advisory firm with more than $25 billion in client assets. Integrated Partners helps accounting firms open their own wealth management businesses via its Integrated CPA Alliance, which facilitates sending and receiving referrals to and from the company’s advisors.

“The process hasn’t been built for it,” Will Hackler, managing partner of Integrated’s retirement plan unit, Integrated Pension Services, said of the tax credit. He cited problems with silos between tax and wealth advisors who work with business owners, as well as technological barriers posed by software unable to deliver reports that could demonstrate the potential savings available for 401(k) startup expenses. 

“We do need to solve it,” Hackler added. “It’s thousands of dollars they’re missing out on.”

These types of strategies speak to how tax planning enables business owners’ advisors to “stack all these benefits” together on their behalf, said John Pastore, an executive vice president and private wealth manager at Integrated.  

“Don’t be afraid to bring up the idea. The idea is like chicken soup — it’s not going to hurt anybody, but it just might help,” Pastore said. “If you’ve got the whole team and they come in for the betterment of the client, the client always wins.”

READ MORE: What do RIAs pay for Schwab as custodian? It all depends 

Talking about the problem, at the very least

Around 41 million American workers between 18 and 65 years old don’t have any retirement plan through their jobs and could use that type of win, according to figures the White House released as part of President Trump’s executive order. While the order largely referred to the saver’s match program that is already set to go into effect in 2027, stakeholders like the Insured Retirement Institute and the National Association of Insurance and Financial Advisors praised the administration for drawing attention to retirement savings.

“It is the policy of the United States to promote high-quality, low-cost individual retirement accounts offered by private-sector financial institutions that meet objective standards of cost, transparency and fiduciary responsibility,” the executive order said. “It is further the policy of the United States to increase public awareness of the Federal Saver’s Match enacted in the bipartisan Secure 2.0 Act and to facilitate participation in eligible retirement-savings vehicles that provide diversified, index-based investment options.”

About four out of five of workers whose annual income is in the lowest 10% of employees do not have a sponsored retirement plan through their jobs, according to the Economic Innovation Group, a bipartisan public policy think tank. The group is calling for passage of new legislation called the Retirement Savings for Americans Act it said would boost access to 401(k) accounts.

“This executive order is an important first step in addressing the fundamental flaw in the U.S. retirement system, which has left too many workers behind,” CEO John Lettieri said in a statement. “We now urge Congress to enact legislation codifying key elements of the order and expanding upon it with features like automatic enrollment of eligible workers and expanded access to matching benefits.”  

Even though “from a purely technical, planning lens, there’s really nothing of significance” in the executive order, President Trump “will no doubt want to heavily promote the TrumpIRA.gov website,” Jeffrey Levine, the chief planning officer of Focus Partners Wealth and the lead financial planning nerd of Kitces.com, wrote on LinkedIn.

“We all know there’s a savings problem in the U.S.,” Levine wrote. “And we all know that lower-income Americans don’t always have access to the same sort of financial advice that is available to those with greater means. And we all know that starting to save earlier in life is one of the best ways to create long-term wealth. So, in the end, if this executive order and the establishment of the TrumpIRA.gov website are able to bring more attention to the necessity of saving for retirement (early), and to valuable savings options (that already exist), we can still, collectively, see that as a win for the American people.”

READ MORE: Wells Fargo Advisors head: ‘No advisor can outgrow this firm’ 

Education key to tax credit

The tax credit for small business employers to commence 401(k) plans dates back 25 years, but the Secure Acts made it bigger, according to the academic paper, which is by researchers from the Treasury Department, the Federal Deposit Insurance Corporation, the Federal Reserve Bank of Chicago, Georgetown University and George Mason University. The provisions are “effectively eliminating startup costs” for companies with 50 or fewer employees and cutting them in half for those with between 51 and 100 workers, the paper said. Firms of those sizes also qualify for credits toward their matching contributions in the first five years of the plan.

Regardless, the researchers’ analysis of federal tax records showed that adoption of the credit “remains low despite recent increases in generosity,” the study said. “Firms with more highly educated owners and whose tax preparer is a CPA are more likely to take up the credit. Our results further suggest that tax preparer learning plays a role in credit take-up. Once a tax preparer files for the credit on behalf of one client, the subsequent credit take-up rate increases among that tax preparer’s other clients. Although the credit is designed to offset startup costs for three years, most firms only claim the credit for one year.”