You have to make a lot of decisions when you retire, and among the biggest is what to do with your workplace retirement savings. No matter how much money you have or how you intend to invest it, you have to first choose where your nest egg will live.
You have four basic choices.
Remain in your employer’s plan and just let the money grow until you have to start taking the required minimum distributions (RMDs).
Remain in your employer’s plan while taking installment payments.
Roll over the assets to an IRA at an institution of your choosing.
Take the account balance in cash and pay tax on the distribution to either spend it or roll it into a Roth IRA.
The good news, according to recent research from Vanguard, is that most people faced with this decision over 10 years, from 2011 to 2021, were able to preserve their retirement dollars. Seven out of 10 kept their assets in a tax-deferred environment, and 90% of the money stayed invested, and presumably, grew a bit. Average balances ranged from $239,300 to $418,900.
“More and more investors are on the right road to having a good experience with accumulations. We’re seeing improvements,” says Matt Brancato, chief client officer for Vanguard Institutional.
But, Brancato adds, “the average doesn’t tell you about individual experience.”
And for that, you have to look at some of the less good news, which is that Vanguard found that 30% cashed out their savings at age 60 or later, most with smaller balances. The average amount of these accounts was $39,700. Some had likely simply saved less, and some had been with the company plan for a short time, so had not accumulated a large amount.
The peril of cashing out
Cashing out a small balance might seem inconsequential to you at the time. The account could be one of many that you have, and the tax burden might not seem too much for you to bear. Or you could be intending to pay the income tax due on the distribution and roll the money into a Roth IRA in a conversion. Or the cash might be enticing – and then it’s gone.
“First of all, ‘small’ is a relative term,” says Brancato. “The dollar amount has to be proportionate to the intent. It’s a highly individualized decision.”
One important step if you’re thinking of cashing out is to consider how the amount involved could possibly grow over time and add to your retirement income later on. If your balance is $39,700 now and you think that isn’t much, it could be $78,000 in 10 years, if it grows at 7%.
At Ascensus, another large retirement plan administrator, they display those numbers to people when they initiate a decision that would impact their retirement savings, like reducing their 401(k) contribution. “We serve up a very quick estimate to connect the dots between what seems like a small amount to a much larger amount of money you’d forgo in retirement as a result,” says David Musto, CEO of Ascensus. After seeing that information, “30% of people ultimately choose not to reduce 401(k),” he adds.
That same kind of information may also help people make a decision between staying in their workplace plan after retiring or moving the money to a rollover IRA. While most eventually move money over to their own account within five years, Vanguard’s study shows that the numbers are shifting up for those staying in their workplace plan even after they retire.
Brancato sees the driver of that being flexible plan design, advice and financial-wellness tools that may be part of an employer package. If you want to tap into your money before you have to take RMDs, for instance, your plan would have to allow it, and Vanguard notes that the number of plans offering this nearly doubled in the past five years.
Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at firstname.lastname@example.org.
We’re still months away from finding out how the Supreme Court views the Biden administration’s plan to cancel student debt. But it’s possible that what they say this time around won’t be the last word.
Activists and student loan borrower advocates have vowed for months to pressure the Biden administration to find another path for debt relief if the justices knock down the initiative. In addition, several exchanges during oral arguments indicated that even if the court strikes the plan down, it could do so narrowly, leaving room for the White House and the Department of Education to try again.
That more moderate approach would focus on the scope of the program and the Biden administration’s reasons for it, instead of the question of whether Congress provided the executive branch with the authorization to cancel student debt.
Christopher Walker, a professor at the University of Michigan Law School, said this narrower route “is more possible than I thought” initially, “just based on how the argument went.”
Ruling in this way would require the justices to create a wonky, but important distinction — that the debt relief program violates administrative law, but doesn’t go against the HEROES Act, the statute passed by Congress in 2003 that the Biden administration says gives the executive branch the power to enact the plan.
That law authorizes the Secretary of Education to waive and modify provisions relating to student loans during a natural disaster or national emergency in order to ensure borrowers are not left worse off. The federal government has argued that means the statute authorizes the Secretary of Education to cancel student debt during the pandemic. The parties challenging the plan say the Biden administration is reading the statute too broadly.
Some of the conservative justices were skeptical that the words “waive and modify” could be interpreted to mean debt cancellation.
“If the court either for that reason or some other rules that the HEROES Act in particular does not allow debt cancellation, that would tie the administration’s hands completely to rely on the HEROES Act again to cancel any debt,” said David Rubenstein, a professor at Washburn University School of Law.
Still, the justices could also find that the HEROES Act authorizes debt cancellation — or punt on that question altogether — and hold that that the Biden administration violated a principal of administrative law that requires an executive agency to “sufficiently explain the reasons why it has chosen the policy that it has, taking into account the relevant facts and alternative pathways that it might have chosen instead,” Rubenstein said.
If the court strikes down the plan on that basis, Rubenstein added, “the agency would then be put to the burden of providing a satisfactory explanation along the lines of what seems to be concerning the conservative justices at oral arguments.”
Conservative justices express worry about fairness
At last week’s hearing, several conservative justices expressed worry about the fairness of the Biden administration’s plan, wondering out loud if the Secretary of Education considered — or should have considered — its impact on Americans who won’t have access to debt relief. To resolve those concerns, Elizabeth Prelogar, the solicitor general of the United States, who was arguing the case on behalf of the Biden administration, tried to steer the justices towards sending the plan back to the Secretary of Education because the agency violated administrative law principles, instead of striking it down on the basis that it’s not authorized by the HEROES Act.
An exchange between Prelogar and Justice Neil Gorsuch exemplified this strategy. Gorsuch asked Prelogar whether the HEROES Act allows for relief that might actually make some of the people who receive the relief better off. “Let’s say two people in Missouri, okay, all right, they’re better off, fine. But what if it’s 90 percent of the class just hypothetically that — could — could the Secretary do that under this statute?” he said.
In response, Prelogar suggested that if the justices were concerned that the program was too broad, they should look to “arbitrary and capricious review” to deal with that worry. That would mean finding that the Department of Education violated administrative law in enacting the debt relief plan by not providing adequate reasoning for it and for its size and scope — but not finding that the HEROES Act doesn’t authorize debt cancellation.
“One of the things you’d want to look at is whether there was a way to tailor it, whether there was a way to segregate the people who actually needed the relief from not,” Prelogar told Gorsuch.
If the court finds that the parties challenging the policy have standing, or the right to sue, the chance that they rule on the merits in this narrower way is relatively small, Walker said — he pins it at about 10% or 20%. But part of what indicates that it could be a possibility is that, “the Chief Justice does like to do these incremental first steps,” Walker said.
Solicitor General’s performance opens up the possibility of a narrower ruling
Walker cited two cases where Chief Justice John Roberts told the Trump Administration to provide better reasons for large executive agency policy, but didn’t say that administration could not pursue them. During oral arguments Roberts said the student loan issue “reminds me” of one of those cases “where the administration tried acting on its own to cancel the Dreamers program, and we blocked that effort.”
In response to skepticism from Roberts that the HEROES Act authorized the executive branch to undertake an initiative that will affect more than 40 million Americans and is estimated to cost roughly $400 billion, Prelogar urged him to consider knocking down the program due to violations of administrative law. That would represent a similar route to the court’s approach in the Trump administration cases.
“To the extent that you have concerns about the scope and size of the program,” she said, “then I think the right place to look to house those concerns is in arbitrary and capricious review. We think here that the Secretary drew reasonable lines in crafting the scope of relief, but if you disagree, or if you think he should have taken different interests into account, that would be a basis to reverse him on arbitrary and capricious grounds, not to distort the plain meaning of the HEROES Act.”
If the court rules in this way, then the Biden administration would need to rewrite the justification for the debt relief plan and perhaps the policy itself in order to address the court’s concerns, Walker said. Though it would likely take “pretty minimal” work from the Department of Education to author a memo with different reasoning, the process could still be tricky, Walker said.
“They would have to answer some political questions they might not want to answer, such as we’re not giving you any relief because of X,” he said. And, even after they take that step, the plan is likely to end up in front of the Supreme Court — which is relatively hostile to broad executive action — once again.
“It could just be a matter of prolonging the inevitable invalidation of the student loan program,” Walker said. “But maybe not.”
Prelogar’s performance on Tuesday opened up the possibility of this narrower ruling that would still keep the debt relief program alive on remand, Walker said, because she tied the program very clearly to the pandemic and the HEROES Act.
“On that front, she stayed on theme the entire time and really gave this consistent message,” Walker said.
That framing “may give the court a little more pause,” in applying the major questions doctrine when thinking about the policy and instead just sending the policy back to the Secretary of Education to provide additional reasoning, he said. The major questions doctrine is a relatively new legal theory, which the Roberts-led court has interpreted to mean that if an executive agency takes an action that’s of political or economic significance it’s overreaching unless Congress clearly authorized the policy.
Another legal route for debt relief
Still, many of the conservative justices probed Prelogar on the Biden administration’s claim that the court shouldn’t apply the major questions doctrine when considering the policy. Even if the court strikes down the debt relief plan down on the basis that the HEROES Act doesn’t authorize debt cancellation, some advocates and legal experts say the Department of Education can still pursue other legal avenues to provide student debt relief.
“They could use one of the other authorities in the Higher Education Act,” said Luke Herrine, an assistant professor at the University of Alabama School of law.
That law allows the Department of Education to “compromise, waive, or release any right” to collect on student loans. Herrine has been writing for years about how the agency can use that authority to cancel student debt. During the 2020 presidential campaign, Senator Elizabeth Warren said that if elected president she would use the compromise provision to wipe out $50,000 in student debt for many borrowers on day one of her presidency.
At oral arguments, J. Michael Connolly, the attorney representing two student loan borrowers challenging the debt relief plan, also acknowledged that this provision gives the Department of Education the authority to cancel student debt.
“The parties are in agreement that they have the power to do this,” Connolly said of the debt relief plan. “Under — under the HEA.”
Officials could use the compromise and waive authority “to implement the same program — indeed they could implement a much broader program since it wouldn’t necessarily have to be targeted to COVID harms,” Herrine said.
Still, the administration would face some challenges going that route. The Higher Education Act requires that the Department of Education submit regulations for notice and comment — a lengthy process — which is not a requirement of the HEROES Act.
“If they do that, are they doing something like a regulation, or are they going to have to modify their existing regulations?” Herrine said. “They would not be able to do that immediately and it’s not clear they’d be able to do it before the payment pause stops.”
Payments are scheduled to resume 60 days after the Supreme Court issues its ruling, or 60 days after June 30, 2023, whichever comes first. For advocates, turning student loan bills back on without debt relief isn’t an option.
“Payments cannot resume until broad-based debt cancellation is enacted,” said Natalia Abrams, the president of the Student Debt Crisis Center. “That’s what we stand by.”
If the Supreme Court knocks down the debt relief plan, the Student Borrower Protection Center and other advocacy groups will be “working hand in glove with this administration about how to revisit this policy,” said Mike Pierce, the executive director of SBPC.
“We know that there are other sources of legal authority that the administration could have used,” he said. “We’re going to keep pushing regardless of the outcome of the court.”
The White House has said it’s not considering other options. Bharat Ramamurti, the deputy director of the National Economic Council, told MarketWatch’s Victor Reklaitis, that there is “no current backup plan,” for if the court knocks down the Biden administration’s plan.
“That’s the plan we’re going with,” Ramamurti said. “We think it’s legal, we think it’s the right approach.
To rule on the merits, the court would need to find the parties have standing
In order to get to the question of whether the debt relief plan is legal, the court will have to determine that the parties have standing, or the right to bring their lawsuits. One case was filed by two student loan borrowers left out of the debt relief plan and the other was brought by six Republican-led states.
The Court’s three liberal justices seemed skeptical of the standing claims. In addition, one of the conservative justices, Amy Coney Barrett, probed James Campbell, the solicitor general of Nebraska who was representing the states, on one of the states’ main arguments for standing. That claim rests on Missiour’s relationship with the Missouri Higher Education Loan Authority or MOHELA, a state-affiliated organization that services federal student loans. The states have said that the debt relief plan could cost MOHELA revenue, which in turn would cost Missouri, giving the state the right to bring the lawsuit.
Barrett pushed Campbell on why MOHELA wasn’t in the courtroom if the state and the organization were so closely intertwined. Justice Ketanji Brown Jackson questioned why the relationship is enough for the court to find standing given that it’s partly predicated on MOHELA paying into a Missouri fund it hasn’t paid into for years.
The other conservative justices didn’t engage much on the standing issue and “it’s hard to know which way that actually cuts,” Walker said. Their focus on the merits could signal they believe the parties have standing and therefore they will get to the merits.
“Or the lack of discussion could actually mean that some are really struggling with it, but they don’t want to air their concerns at oral arguments,” Walker added. “It’s hard to read anything into silence.”
Both Walker and Herrine agreed that Campbell didn’t present a very clear rationale for standing.
“We know that these conservative justices have in the past been skeptical of expanded standing,” Herrine said. Tara Grove, a professor at the University of Texas School of Law, noted Roberts wrote a “really forceful dissent” in 2007 “as to why states should not get a special leg up in going to court.”
Given that the case for standing wasn’t that compelling and some of the conservative justices’ history on the standing issue, “they might be more skeptical,” Herrine said.
“All of that leads me to believe that there’s more votes in play on the standing issue,” Herrine said.
Still fighting for cancellation regardless of how the court rules
Regardless of how the court rules, Madeleine Pope, who uses they/them pronouns, says they’ll still be fighting for mass debt relief. The activism outside the courthouse Tuesday and the media coverage surrounding it, “inspired me,” Pope said. “I was like okay, I can feel the camaraderie and the kind of union inspiration from this.”
The 36 year-old has about $70,000 in student loan debt from college and graduate school. Pope also participates in activism surrounding student loans and debt more broadly with the Debt Collective, an organization that has been pushing for mass student loan cancellation for more than a decade.
Pope had always planned to have their debt canceled through the Public Service Loan Forgiveness program, an initiative that allows borrowers working for the federal government or certain nonprofits to have their federal loans discharged after 10 years of payments.
By the time the pandemic hit, Pope was about eight payments away from having the debt from college discharged, but then got laid off. Pope searched for a new job for about nine months and when they finally found one it was for a for-profit company — meaning any months spent in that job don’t count towards relief under PSLF.
“Even though I had worked over 10 years at that point in qualifying work I was still eight payments away because of strange little loopholes in the program that definitely did not make sense to me.” For example, Pope had submitted monthly payments before the bill was technically due.
Last year Pope submitted paperwork to see if any more payments would count under a temporary expansion of the Public Service Loan Forgiveness program that the Biden Administration launched last year. Pope hustled to get employers they hadn’t worked for for years to fill out the forms, but Pope got the documents in before the deadline. Now, Pope is waiting to hear back.
If the court strikes down the Biden administration’s broader debt relief plan, Pope will continue to protest as well as call and write to lawmakers to push them to support student debt cancellation — and encourage others to do the same. Pope will also continue to share information and resources to help borrowers understand their debt as part of a broader system and feel less shame surrounding it.
“I got involved with organizing because of the government not doing what I think it should be doing,” Pope said. “I absolutely believe that we can support each other and we can take care of this despite what the government does.”
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