Correcting Retirement Myths

Employer-Sponsored Retirement Plans: Behind the Numbers

We hope that this article finds you, your family, and your team safe and healthy as we all continue to live in unprecedented times. Hopefully, we are nearing the end of the pandemic and related disruptions as the vaccines become more readily available and widely distributed across the country.

In the fast-moving world of college and professional athletics (and corporate America for that matter), it has been our experience that there are several misconceptions regarding benefits packages, and, more specifically, employer-sponsored retirement plans. In this article, we will attempt to clarify two of the most common misconceptions and also share a case study showing their impact.

“I Am Maxing Out My Retirement Plan”

We find that a lot of retirement savers of various ages, professions, and educational backgrounds are under the impression that they “max out” their employer-sponsored retirement plan simply because they contribute enough to get the maximum possible match from their employer. However, in those cases, they are usually unaware of the actual IRS salary deferral limit of $19,500 for 2021 ($26,000 if older than 50 years old).

While those deferral amounts may not be affordable for everyone reading this article, it is extremely important to make sure you contribute at least enough to receive the most “free money” you can get from your employer. In a recent industry survey regarding retirement plans offered by higher education organizations1, 65 percent of organizations offer a match of your salary deferral into the organization’s retirement plan (403(b), 401(k), etc.), and almost 80 percent of those organizations generously match at least 50 percent of your salary deferral. However, only 47 percent of organizations replied that at least 90 percent of their employees contribute enough to maximize the match.

That same survey found that:

  • 44 percent of organizations offer a contribution that does NOT require salary deferral by the employee.
  • 57 percent of those organizations contribute an amount equal to 5 percent or more of your compensation (up to a limit of $290,000 of compensation in 2021).

That all adds up to a heck of an opportunity to build up your retirement savings if you make the right elections upon your initial hiring or benefits enrollment period.

“What You See is What You Get”

While the aforementioned employer matching and contribution benefits may seem overwhelmingly generous, there is usually a catch. As such, over 30 percent of organizations in the survey require at least one year of service before the matching contributions are 100 percent vested. Therefore, it is important to consider that you may not be entitled to every dollar you see on your quarterly statement or benefits website if you have not met the plan’s specific vesting requirements.

As we all know, working at least 12 months at an organization is not necessarily a sure thing in the coaching world. Sometimes the hiring cycle and coaching carousel prevent that from happening. If you are hired in January of a certain year and you leave for another job in December, you may be disappointed in how that affects your retirement savings.

A Case Study

Coach Smith is hired for his first “Power 5” assistant coaching position on January 10. His contract is for $225,000 per year. After meeting with the university’s human resources staff, he learns that the 403(b) plan offers a 5 percent contribution regardless of his own deferral as well as a match of 100 percent of the first 5 percent that he defers. These benefits both have a one-year vesting schedule. Therefore, he decides to contribute 5 percent of his own salary which equates to $12,500. So, in total, an amount equal to 15 percent of his salary is going into his retirement plan.

After a great season, Coach Smith is approached and hired as a coordinator at a “Group of 5” university on December 30. His new two-year contract pays him $275,000 per year. The benefits plan at his new job offers a match of 100 percent of his contribution up to 6 percent with a two-year vesting schedule, but he is not eligible to receive the match until he completes one year of service. This university has fallen on hard financial times and does not currently offer any additional contributions. So, he decides to contribute 5 percent of his salary into the plan for now because that is what he contributed at his previous school. He does not have much time to think about this because, after all, he needs to contact recruits, install his playbook in time for Spring practice, and help his family move to its new hometown.

Coach Smith goes on to have a great run as a coordinator at the “Group of 5” school for four years, and his career has an upward trajectory from there.

But, in the meantime, here is a look at Coach Smith’s retirement savings over a three-year period:

 Year OneYear TwoYear Three
Salary$225,000$275,000$275,000
Salary Deferral (5%)$11,250$13,750$13,750
University Match$11,250 (up to 5%)$0$13,750 (only 5% of 6%)
Additional Univ. Contribution$11,250 (5%)$0$0
Vested Savings Amount$11,250$13,750$27,500
*Example is for illustrative purposes only.

So, over a three-year period, Coach Smith has accumulated $52,500 towards his retirement. This represents approximately 6.7 percent of his salary over that period. On a related note, he could have deferred an additional $19,750 of his own salary. He also left $25,250 of “free” money on the table because he did not vest in the plan in year one and he did not contribute enough to get the full 6 percent match in year three. Hopefully, you can see the various challenges associated with your profession and retirement planning.

Is Coach Smith saving enough to retire comfortably if this pattern continues? Many retirement plan providers recommend saving at least 10 percent annually over the course of your career 2.  We agree with that savings rate as a starting point and would encourage you to strive for a savings rate closer to 15 percent. Now, if you can safely predict that you’ll be at a job long enough for their contributions to fully vest, you may be able to dial down your own salary deferral. But, if your career takes you to a new job every 1-3 years, your own salary deferral may be all that you can safely assume will be there for you in the long run.

Wrap Up

As coaches, you ask and sometimes even demand extra effort from your players to give your teams a better chance at winning games and achieving your goals. But what about asking yourself to make a similar sacrifice of giving a little “extra” into your university-sponsored retirement plan?

YOU MIGHT ALSO LIKE: Financial Playbook For College Coaches

You only get one chance to call the right play when the championship game – or a successful retirement – is on the line. Plan and execute accordingly.

As always, we encourage you to work with a financial advisor to put together a customized financial plan which considers your existing retirement savings, your career path, and your goals and objectives. Please reach out if we can help.

About The Authors

Investment with Matt Kuerzi and Keith NorrisKeith Norris, First Vice President and Financial Advisor, and Matt Kuerzi, Vice President and Financial Advisor, are co-founders of The Derby City Group at Morgan Stanley in Louisville, Kentucky. They have combined over 40 years of experience helping families with their financial planning.3 In 2019, Matt was recognized by Forbes in their first ever list of “Best-In-State Next-Gen Advisors.” He can be reached directly at (502) 394-4094 or matt.kuerzi@morganstanley.com.

Branch address: 4969 U.S. Highway 42, Suite 1200, Louisville, KY 40222

(1) PLANSPONSOR Defined Contribution Survey, 2020

(2) https://www.cnbc.com/2019/06/06/how-much-americans-are-contributing-to-their-401k-plans-every-year.html

(3) Keith Norris, First Vice President, Financial Advisor, experienced in the financial services industry since 1997. Matt Kuerzi, Vice President, Financial Advisor, experienced in the financial services industry since 2002.

* The case study presented is hypothetical and provided for illustrative purposes only. The events and details presented do not reflect the circumstances of an actual client.

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest.

The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Past performance is no guarantee of future results. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Investment Advisers Act of 1940,  ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

Source: Forbes Magazine (September 2019).  Data provided by SHOOKTM Research, LLC. Data as of 3/31/19. SHOOK considered Financial Advisors born in 1980 or later with a minimum 4 years relevant experience, who have: built their own practices and lead their teams; joined teams and are viewed as future leadership; or a combination of both. Ranking algorithm is based on qualitative measures: telephone and in-person interviews, client retention, industry experience, credentials, review of compliance records, firm nominations; and quantitative criteria, such as: assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary, and advisors rarely have audited performance reports. Rankings are based on the opinions of SHOOK Research, LLC, which does not receive compensation from the advisors or their firms in exchange for placement on a ranking. The rating may not be representative of any one client’s experience and is not indicative of the Financial Advisor’s future performance. Neither Morgan Stanley Smith Barney LLC nor its Financial Advisors or Private Wealth Advisors pays a fee to Forbes or SHOOK Research in exchange for the ranking. For more information see www.SHOOKresearch.com.

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