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Benefit Plan Trends - Volume 61, Issue 8

Lundstrom Insurance Agency, Inc.

2205 Point Blvd., Suite 200
Elgin, Illinois 60123
Phone: (847) 741-1000
Fax: 847-428-8857

This publication intends to provide accurate information pertaining to the subject matter covered, however, it should not be considered as legal or tax advice. It is published and distributed with the understanding that neither the publisher nor Lundstrom Insurance Agency is rendering legal or tax advice. Before taking any action, you should always obtain specific advice and assistance from a competent attorney or tax advisor.

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A report covering plan design and legislative changes

Executives Report That Tax Reform Allows For New Investments

The vast majority of C-suite executives in the U.S. believe that the recent tax reform will make their company more competitive by providing tax savings that can be used for new strategic investments, according to the results of a survey fielded by professional services provider PwC to investigate how businesses are changing their strategies to take advantage of the Tax Cuts and Jobs Act of 2017 (TCJA).
In the survey of 403 CEOs, CFOs, and COOs, conducted April 23-May 10, 89% of respondents reported that their company has experienced savings as a result of the tax reform, and that these savings will have implications for how they run their business. Moreover, 79% of the executives surveyed said they believe tax reform savings will give their company an opportunity to make strategic business investments not possible in the past, and 81% reported that their company has developed a long-term strategy for investing tax reform savings. 
When asked what kinds of investments their company has made in response to the TCJA, 63% of respondents said they have invested in their workforce by, for example, increasing hiring (24%), raising wages (24%), making contributions to retirement plans (22%), expanding benefits (21%), reskilling (21%), and providing a one-time employee bonus (18%). 
In addition, 62% of respondents indicated that their company has invested in strategy and capabilities, including digital capabilities (23%), R&D (22%), long-term strategy (22%), cybersecurity (20%), M&A (19%), and new service/product offerings (18%). Another 30% of respondents reported that their company has invested in corporate finance, including paying off debt (20%) and executing share buybacks (15%).
Moreover, when asked to identify the areas their company is likely to invest in over the next year as a result of changes in the tax code, 87% of the executives surveyed said they expect to invest in their workforce by increasing hiring (65%), raising wages (62%), expanding benefits (59%), reskilling (54%), making contributions to retirement plans (50%), and providing a one-time employee bonus (49%). Meanwhile, 80% of respondents said their company intends to invest in growing stronger capabilities, including R&D (61%), long-term strategy (58%), digital capabilities (54%), cybersecurity (54%), M&A (51%), and new service/product offerings (48%); and 65% said their company plans to reach customers by lowering their prices (55%) and expanding their geographic footprint (53%).
The results further indicated that 78% of respondents believe that the TCJA makes the U.S. a more attractive place for their company's business, with 30% saying their company is likely to make geographic changes as a direct result of the tax reform; and another 34% indicating that they are considering implementing similar changes, including moving or adding administrative offices, shared services, R&D centers, service points, manufacturing plants, and distribution centers.

Salaries Are Projected To Surge Due To Global Talent Shortages

Compensation for highly skilled workers could rise sharply in response to global talent shortages, which could jeopardize the profitability of companies and threaten their business models, a new study conducted by executive recruitment firm Korn Ferry has warned. 
The study, released on June 20, examined the impact of the global talent shortage on payrolls in 20 major global economies at three milestones: 2020, 2025, and 2030; and across three sectors: financial and business services; technology, media, and telecommunications (TMT); and manufacturing. The aim of the study was to measure how much more employers might be forced to pay workers above normal inflation increases.
The results of the analysis showed that if salaries continue to increase at their current rate, $2.5 trillion could be added to annual payrolls globally by 2030. Broken down by sector, the study found that financial and business services face a potential wage increase of more than $440 billion by 2030; or more than double the wage premium of the other sectors examined. The findings also indicated, however, that the wage premium for TMT could almost triple within the next decade, jumping from more than $59 billion in 2020 to $160 billion by 2030; while manufacturing could face additional salary increases of more than $197 billion by 2030.
The study also found that surging salaries will have a huge impact at the country level, with U.S. and Japanese companies seeing the largest increases: according to the analysis, the U.S. is projected to face a wage premium of more than $531 billion by 2030, while Japan is on course to pay an additional $468 billion in compensation by 2030.
The results further showed that the average pay premium (i.e., the amount employers have to pay above the amount salaries would have risen over time due to normal inflation) per highly skilled worker by 2030 across the 20 economies studied is $11,164 per year. The countries projected to face the largest wage premiums per year per highly skilled worker by 2030 are Hong Kong ($40,539), Singapore ($29,065), and Australia ($28,625).
Researchers observed that smaller markets with limited workforces are likely to feel the most pressure: for example, Singapore and Hong Kong are projected to experience salary premiums equivalent to more than 10% of their 2017 gross domestic product (GDP) by 2030. The analysis also found that while the UK and France have a better short-term outlook, by 2030 the UK's wage premium could be equivalent to 5% of its 2017 GDP, and France's could be equal to 4% of its 2017 GDP.
Turning to the largest Asian countries, the study estimated that by 2030, China may see an additional salary increase of more than $342 billion. Researchers noted that India is the only economy in the study expected to avoid a surge in wages because, unlike the other countries in the sample, India is projected to have a surplus of highly skilled talent at each milestone.


Millennial Workers Benefit from Automatic Features in Retirement Plans

Millennials are the first generation of workers to fully benefit from improvements made to retirement plans over the last decade, including the introduction of automatic features, and these improvements are reflected in their retirement savings habits and attitudes, the results of a survey conducted by retirement benefits consultancy Empower Institute indicate.
The survey of 4,038 working adults aged 18 to 65 was conducted between December 18, 2017, and January 21, 2018. Researchers observed that the landmark Pension Protection Act of 2006 (PPA), which was enacted at a time when the millennials were first entering the workforce, recognized the importance of employer contributions to employee accounts, and reformed workplace retirement plans in a number of ways. 
Most significantly, researchers noted, the PPA allowed retirement plan sponsors to implement automatic enrollment of plan participants and automatic escalation of participants' contributions. The survey found that 41% of millennial respondents are automatically enrolled in a defined contribution plan, compared to 38% of Gen Xer and 33% of baby boomer respondents; and that 38% of millennial respondents are enrolled in a plan with auto-escalation features.
The survey results included a retirement progress score (RPS), or a numeric estimation of the percentage of working income that U.S. households are on track to replace in retirement. The findings showed that the median projected income replacement among all the survey participants is 64%. Broken down by generation, the findings indicated that respondents of the millennial generation (born after 1981) are on track to replace 75% of their income in retirement, compared to 61% for Generation X and 58% for baby boomer respondents. Researchers also observed that there is an 11-point difference in median income replacement percentages among participants across all generations who were enrolled automatically in a defined contribution plan and those who opted into a plan.
In addition, the survey results suggested that attitudes about retirement planning differ across the generations, with millennial workers expressing less certainty than their older counterparts that Social Security will provide them with retirement income in the future. When asked to identify the sources they expect will provide them with income during retirement, 59% of millennial respondents cited Social Security, compared to 88% of boomer and 73% of Gen X respondents. By contrast, 61% of the millennials surveyed, compared to 55% of the Gen Xers and 47% of the boomers, said they see defined contribution plans as a likely source of income in retirement. Moreover, 48% of the baby boomers surveyed said they believe they will need to work at least part time in retirement, compared to 44% of the Gen Xers and 40% of the millennials.
The findings further indicated that while millennial respondents currently have smaller amounts of investable assets than Gen Xers and baby boomers, who have been in the workforce longer, these younger workers are more likely than their older counterparts to have a financial advisor and a formal retirement plan: 24% of millennial respondents reported having a formal retirement plan, compared to 19% of Gen X and 17% of baby boomer respondents. The overall retirement progress scores of respondents were also found to vary depending on whether they reported receiving paid advice: those with a paid advisor had a median retirement progress score of 91%, while those without a paid advisor had a median RPS of only 58%. 

Action Called For To Provide Gig Economy Workers with Access to Benefits

Noting that employees in the U.S. are entitled to a long list of legally mandated benefits and protections whereas independent contractors are not, a recently published law and policy article argued that many gig economy workers occupy an ambiguous area between employee status and independent contractor status that demands legal clarification, as well as action by legislators and businesses to ensure that these workers are not left with little bargaining power or access to important benefits like health care and retirement savings plans. 
"Workers, Protections, and Benefits in the U.S. Gig Economy," by Seth D. Harris, an attorney and visiting professor at the Cornell Institute for Public Affairs, was posted online on July 12, and will be included in the forthcoming Global Law Review (September 2018). Harris observed that under existing U.S. labor, employment, and tax laws, a worker in any one work relationship is either an "employee" or an "independent contractor;" but that this binary classification of workers has been called into question by "gig economy" or "online platform" companies that provide personal labor services through smartphone apps, such as ride-hailing, food delivery, and home cleaning and handyman/woman services. 
According to Harris, while independent contractors are presumed to have sufficient individual bargaining power to secure their own individual contracts with contracting partners, online platform companies' relationships with their "independent workers" force these workers into a gray area between employee status and independent contractor status. He pointed out that U.S. law does not currently offer a clear and broadly applicable rule for resolving the resulting ambiguities and ensuring consistent and predictable decisions by adjudicators, which could lead to serious social and economic problems.
The article outlined several potential policy solutions to address these gaps, including the amendment of labor, employment, antitrust, and tax laws by Congress and state legislatures to allow independent workers and other workers in similar relationships with companies to organize and bargain collectively, secure protection from labor market and workplace discrimination, and benefit from companies withholding their income taxes and contributing to payroll taxes and health insurance at the same levels they contribute for employees. 
A second potential strategy described in the article calls for the enactment of new laws or policies permitting or facilitating the creation of "portable benefits" systems, in which benefits are easily transferable for workers engaged with multiple companies. Such systems could be offered by government, online platform companies in partnership with third-party providers, or third-party entities.
Finally, Harris suggested that Congress and state legislatures consider establishing or expanding public benefits systems to provide benefits and protections to all independent and similar workers, explaining that "as with non-governmental portable benefits systems, some benefits and protections could be included in these public systems—retirement savings, health insurance and other forms of insurance, paid leave systems—while others that are inextricably bound up with a particular work relationship, especially minimum labor standards, could not be included."

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.

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