ExxonMobil has suspended its generous 7% match for employee contributions to the ExxonMobil Savings Plan (EMSP) effective October 1. What’s an employee to do?
The ExxonMobil Savings Plan is one of the pillars of retirement assets for ExxonMobil employees. And at 7% of compensation, the company match for a 6% or greater employee contribution is a significant expense for the Corporation.
Employees have choices come October 1
ExxonMobil, like the rest of the energy industry, is going through tough times. Crude prices are stuck around $40/bbl., demand for refined products is down, investors are fleeing the sector, and many question whether the dividend on XOM stock can be maintained. Times are rough, indeed.
Nevertheless, employees have choices come October 1. There’s no one answer that’s right for all employees. We explain below the rationale for different alternatives. While you won’t get the return on your contribution that you did when the Corporation made its match, there are valid reasons for continuing to save, either inside or outside of the EMSP.
Option 1: If you haven’t reached the annual maximum, continue your payroll contributions to the Plan.
You may be contributing to the Before-Tax or Roth 401(k) accounts and haven’t yet reached the $19,500 maximum for 2020 (plus an additional $6,500 if you’re 50 or older). If that’s the case, you may want to continue to contribute as you have been doing. Contributions to the Before-Tax account reduce your taxable income. Contributions to the Roth 401(k) account build tax-free assets you’ll have down the road in retirement.
Option 2: If you’ve already reached the maximum, you may want to continue making after-tax contributions to the Plan.
Unlike many 401(k) plans, the EMSP permits participants to contribute after-tax dollars to the Plan. And while the earnings on after-tax contributions are still taxed when eventually distributed out of the Plan or an IRA, those after-tax contributions can be used in several different ways.
You can save taxes with after-tax contributions. Suppose you have low-cost XOM stock that’s appreciated. You can use your after-tax contributions to reduce the tax bill if you choose to take stock as stock and move it to a taxable investment account. You can subsequently sell it and pay capital gains tax on the net unrealized appreciation or donate it. This tax strategy is called Net Unrealized Appreciation (NUA), which we’ve explored in another blog. Were you to sell it inside the EMSP and transfer the funds to an IRA, you’d pay ordinary income tax when you take the money out.
You can build up a Roth IRA with after-tax contributions. When you take distribution of your account, you can have after-tax contributions sent to a Roth IRA. There are many advantages with a Roth IRA in retirement or as an asset to leave to heirs.
You can receive after-tax funds tax-free when you retire. Finally, once those after-tax contributions have worked hard to generate earnings inside the EMSP, you can withdraw them at retirement–consider that a retirement gift from the EMSP!
Option 3: You can re-direct your contributions to an individual investment account and stop contributing to your EMSP.
Some observers argue that 401(k) plans aren’t nearly as attractive as when they were first established. Personal tax rates are significantly lower today than in the mid-1980s when the before-tax treatment of employee contributions first became broadly popular among employer plans. The Economic Recovery Tax Act of 1981 slashed the highest rate from 70 to 50 percent. What participants save in taxes by contributing on a before-tax basis to a 401(k) plan isn’t nearly as attractive as back when tax rates were so much higher.
You can earn the rate of interest on your debt by reducing your debt
Without a match from the company, you must consider where those dollars you might otherwise have contributed will do the most good. Depending on your circumstances, it may make more sense to direct the dollars that might have gone to your EMSP into an investment account. There you’ll find more investment opportunities than in the EMSP. You’ll have tax-paid assets, and you can use the funds for a variety of purposes. Keep in mind those savings could pay the taxes for a Roth conversion from your IRA when your income is lower than during your years of employment.
Option 4: Instead of saving in the EMSP, pay off debts.
Suppose you’re paying interest on a credit card account, a student loan, a car loan, or a mortgage. You can earn that rate of interest by reducing that debt. It may make sense to stop saving in the EMSP to get your financial house in order. Without a company match, you’re not forgoing “free money.” You may find that reducing your debt frees up more money later for saving (perhaps when the match resumes) as well as letting you sleep more soundly at night. A rainy day fund of three to six months of ongoing living expenses is fundamental to Personal Finance 101.
What’s best for you and your family takes thought and objectivity. We’ve offered four options for you to consider. Contact us today if you’d like a personal consultation about your EMSP account or your preparation for retirement in general.
Cerity Partners LLC (“Cerity Partners”) is an SEC-registered investment adviser with offices in California, Colorado, Florida, Illinois, Massachusetts, Michigan, New York, Ohio and Texas. Registration of an Investment Advisor does not imply any level of skill or training. There is no guarantee that the views and opinions expressed will come to pass. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees, conflicts of interest, and services, send for our disclosure statement as set forth on Form CRS and ADV Part 2 using the contact information herein. Please read the disclosure statement carefully before you invest or send money. Nothing contained herein shall constitute an offer to sell or solicitation of an offer to buy any security. You should not construe the information contained herein as personalized investment, tax, or legal advice. Material in this publication is original or from published sources and is believed to be accurate. The information presented is subject to change without notice and is deemed reliable but is not guaranteed. Readers are cautioned to consult their own tax and investment professionals with regard to their specific situations. Cerity Partners is not endorsed by or affiliated with Exxon Mobil Corp.
Meet the Author
Doug is a Partner based in the Houston office and a member of the firm’s Wealth Management practice. He is responsible for delivering investment and planning services to clients. His specialty is assisting clients who are approaching retirement to evaluate the options they have as they prepare for the next chapter in their lives.
Prior to joining Cerity Partners, Doug was a Senior Wealth Advisor at Investec Wealth Strategies. Previously, Doug was Manager, Global Benefits Design, at ExxonMobil. He was responsible for the design of corporate benefit programs including pension, 401(k) plan, medical, and insurance plans. He helped design and implement a corporate health strategies program (“Partners in Health”) and a financial literacy program (“Financial Fitness Program”).
Doug earned a BA in psychology from Yale University and received his MBA in industrial relations from the Wharton School of the University of Pennsylvania. He is a CERTIFIED FINANCIAL PLANNER™ professional.
Doug is an active volunteer at The Woodlands Methodist Church and Jubilee Prison Ministry. He and his wife are also members of the National Leadership Council of World Vision USA.