New 401(k) Rules Spawn Marketing Effort
July 23, 2001
As fall approaches, Thomas Clough, the president of New York Life Benefit Services, is excitedly readying a team of marketers to walk into office buildings and talk to workers of all ages and all incomes about their 401(k) plans.
The group of executives will spend the autumn months preparing employees for the implementation of the tax package that was signed into law earlier this summer and that includes lesser-known provisions that will affect employees' retirement plans.
The new tax law, which goes into effect in January, will increase the amount investors can contribute to their 401(k) plans from the current cap of $10,500 to $11,000 in 2002. Between then and 2006, the limits will increase incrementally until they hit $15,000. The plan also includes a "catch-up" provision that allows those age 50 and older to contribute an additional $1,000 to their retirement accounts in 2002.
Clough says the changes are nothing short of revolutionary. And, he says, those changes have the potential to bring a significant number of new assets into mutual funds. He says the plan also represents an ideological shift in public policy. Never before has the federal government altered pension legislation on the basis of how policy affects workers, instead of simply tax revenues.
"The government is finally recognizing the need for a national retirement policy," Clough said. "It's going to be felt without question. It's long overdue."
But it will be particularly important, Clough says, that professionals educate investors about their new options. That is why his team is planning this campaign of fall seminars and workshops. His executives will target specific demographic groups, including low-income earners and those nearing retirement wage. They will also speak with what Clough calls "second-income earners," spouses or life partners who earn supplemental incomes that don't pay, say, the mortgage or the car payments, but provide a little extra cash for groceries and fun. Those earners, he says, can now take advantage of the higher contribution caps and sock more of their money into 401(k) plans.
The audience the New York Life executives will address is diverse because the policy changes affect nearly all workers, Clough says. And that means financial planners and investment professionals of all types can benefit. "There's really something in it for everyone," he said.
Of course, there's one catch in all of this: Just because workers can invest more doesn't mean they will. Investment Company Institute spokesman John Collins said the industry group supported the Bush plan based on the simple logic that allowing investors to contribute more to their 401(k) plans would mean that more assets could trickle into mutual funds. But he said there is no hard evidence that investors have the earning power to make that a reality.
"Does it mean that more money will flow into 401(k) plans? We don't know," he said. "It will certainly allow it, but we don't know if it's going to bring more assets into the mutual fund industry."
Factors that could scuttle Clough's rosy picture for mutual funds include the economy, the popularity of mutual funds in relation to other investment vehicles and the ability of workers to increase their earning power. The economy could tank, sparking layoffs and shifting the priorities of many Americans from retirement planning to paying the electric bill, Collins said.
In addition, he said, even if millions of new dollars flow into 401(k) plans, there is no guarantee how much of that will land in mutual funds. Americans had invested $1.7 trillion in 401(k) plans in 1999, Collins said. Of that, mutual funds held $766 billion or roughly 45%. The rest was invested in bonds, common stocks and other investment vehicles.
"We would hope that more money would go into mutual funds, but we don't know," he said.