Top 10 401(k) compliance mistakes auditors catch
There are a number of emerging Department of Labor issues that employers should be aware of in order to ensure their benefit plans are compliant and being properly administered. Knowing the DOL is going to be vigilant in these areas means that now is a good time to review benefit plan documentation and administrative practices to ensure compliance.
Here are the top-10 mistakes auditors catch:
1. Late or erratic payment of employee deferrals. According to the DOL, contributions must be paid as soon as administratively feasible, but no later than the 15th business day of the following month (when deferrals are withheld). Employee contributions should be within this time frame, but also consistently remitted among all payrolls and pay periods.
2. Oversights in calculating employee contributions. 401(k) contributions should be determined in accordance with the plan document (which should include the definition of compensation) andin accordance with employees’ instructions.
3. Misunderstanding of the vesting period. Each plan defines when employees reach one year of service. HR and other departments may calculate it differently.
4. Disregard for break-in service rules. Usually, plans state that when employees leave and are rehired within a certain time frame, that they're automatically eligible to participate in a 401(k) plan. This rule is sometimes overlooked.
5. A growing number of forfeiture accounts. When employees leave and forfeit their 401(k) balances, those funds aren't always used as outlined in the plan, such as for paying employer-plan fees or in the time frame required by the Internal Revenue Service.
6. Incorrect tax witholdings when employees take distributions. People can take distributions from employer-sponsored plans prior to age 59½, but these early-withdrawals must be made in accordance with IRS rules in terms of penalties and any income taxes due.
7. Mistakes with profit-sharing contributions. Errors occur most often when annual calculations are performed manually vs. being automatically tallied through payroll software.
8. Mishandling employee requests. When employee requests, such as changes in deferral percentages, are handled manually, they are sometimes coded incorrectly or simply not entered at all.
9. Disconnect with service-provider contracts. Sometimes, there’s a disconnect between the company and its service provider. Responsibilities should be crystal clear, especially in the areas of hardship withdrawals and informing employees of eligibility.
10 Overlooking the plan's eligibility requirements. Some employees may be enrolled too early or too late ― or forgotten altogether, which can be the case with employees working at another corporate affiliate or division.
IRS Announces 2015 Retirement Plan Contribution Limits
Source: ThinkHR.com
On October 23, 2014 the Treasury Department announced cost-of-living adjustments affecting dollar limitations for pension plans and retirement accounts for tax year 2015. The following is a summary of the changes that impact employees:
401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plans
- The elective deferral (contribution) limit increased from $17,500 to $18,000.
- The catch-up contribution limit for employees aged 50 and over who participate in these plans increased from $5,500 to $6,000.
Individual Retirement Arrangements (IRAs)
- The limit on annual contributions remains unchanged at $5,500.
- The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
Simplified Employee Pension (SEP) IRAs and Individual/Solo 401(k)s
- Elective deferrals increase from $52,000 in 2014 to $53,000 in 2015, based on an increased annual compensation limit of $265,000, up from $260,000 in 2014.
- The minimum compensation that may be required for participation in a SEP increases from $550 in 2014 to $600 in 2015.
SIMPLE (Savings Incentive Match Plan for Employees) IRAs
- The contribution limit on SIMPLE IRA retirement accounts for 2015 is $12,500, up from $12,000 in 2014.
- The SIMPLE catch-up limit is $3,000, up from $2,500 in 2014.
Defined Benefit Plans
- The basic limitation on the annual benefits under a defined benefit plan is unchanged at $210,000.
Other Changes
- Highly-compensated and key employee thresholds: The threshold for determining “highly compensated employees” increases from $115,000 to $120,000 in 2015; the threshold for officers who are “key employees” remains at $170,000 for 2015.
- Social Security Cost of Living Announcement: In a separate announcement, the Social Security Administration increased the Taxable Wage Base from $117,000 in 2014 to $118,500.
- The maximum “Old Age, Survivor and Disability Insurance” (OASDI) tax will be $7,347 for both employers and employees; and
- Hospitalization Insurance (Medicare) tax continues to apply to all wages.
The IRS pension plan limits announcement with more details is available here.
The Social Security Administration Fact Sheet outlining the 2015 changes can be found here.
The Retirement Readiness Challenge: Five Ways Employers Can Improve Their 401(k)s
Originally posted October 20, 2014 on www.ifebp.org.
Today, nonprofit Transamerica Center for Retirement Studies® ("TCRS") released anew study and infographic identifying five ways employers can improve their 401(k)s. As part of TCRS' 15th Annual Transamerica Retirement Survey, this study explores employers' views on the economy, their companies, and retirement benefits. It compares and contrasts employers' views with workers' perspectives.
"As the economy continues its prolonged recovery from the recession, our survey found upbeat news that many employers are hiring additional employees. Moreover, they recognize the value of offering retirement benefits," said Catherine Collinson, president of TCRS.
Seventy-two percent of employers have hired additional employees in the last 12 months (compared to only 16 percent that say they have implemented layoffs or downsizing). Among employers that offer a 401(k) or similar plan (e.g., SEP, SIMPLE), the vast majority (89 percent) believe their plans are important for their ability to attract and retain talent.
Retirement Benefits and Savings Are Increasing (Yet More Can Be Done)
Employers are increasingly offering 401(k) or similar plans to their employees. Between 2007 and 2014, the survey found that the percentage of employers offering a 401(k) or similar plan increased from 72 percent to 79 percent. The offering of a plan is highest among large companies of 500 or more employees (98 percent) and small non-micro companies of 100 to 499 employees (95 percent) and lowest among micro companies of 10 to 99 employees (73 percent).
During the recession and its aftereffects, many 401(k) plan sponsors suspended or eliminated their matching contributions. Plan sponsors that offer matching contributions dropped from 80 percent in 2007 to approximately 70 percent from 2009 to 2012. In 2014, the survey found that 77 percent of plan sponsors now offer a match, nearly rebounding to the 2007 level.
"Despite the tumultuous economy in recent years, 401(k) plan participants stayed on course with their savings," said Collinson. According to the worker survey, participation rates among workers who are offered a plan have increased from 77 percent in 2007 to 80 percent in 2014. Among plan participants, annual salary contribution rates have increased from seven percent (median) in 2007 to eight percent (median) in 2014, with a slight dip to six percent during the economic downturn.
Workers' total household retirement savings increased between 2007 and 2014. The 2014 estimated median household retirement savings is $63,000, a significant increase from 2007, when the estimated median was just $47,000. Notably, Baby Boomers have saved $127,000 (estimated median) in household retirement accounts compared to $75,000 in 2007. "For some workers, current levels of retirement savings may be adequate; for many others, they are not enough," said Collinson.
Five Ways Employers Can Improve Their 401(k)s
"401(k)s play a vital role in helping workers save and invest for retirement," said Collinson. "Until every American worker is on track to achieve a financially secure retirement, there will be opportunities for further innovation and refinements to our retirement system."
The survey identified five ways in which employers, with assistance from their retirement plan advisors and providers, can improve their 401(k)s. Plan sponsors are encouraged to consider these enhancements to their plans:
1. Adopt automatic plan features to increase savings rates
"Automatic enrollment is a feature that eliminates the decision-making and action steps normally required of employees to enroll and start contributing to a 401(k) or similar plan," said Collinson. "It simply automatically enrolls employees. They need only take action if they choose to opt out and not contribute to the plan."
The percentage of plan sponsors offering automatic enrollment increased from 23 percent in 2007 to 29 percent in 2014. Plan sponsors' adoption of automatic enrollment is most prevalent at large companies. Fifty-five percent of large companies offer automatic enrollment, compared to just 27 percent of small non-micro companies and 21 percent of micro companies.
Plan sponsors automatically enroll participants at a default contribution rate of just three percent (median) of an employee's annual pay. "Defaulting plan participants into a 401(k) plan at three percent of annual pay can be very misleading because it implies that it is adequate to fund an individual's or family's retirement when in most cases, it is not," said Collinson. "Plan sponsors should consider defaulting participants at a rate of six percent or more of an employee's annual pay."
"Automatic increases can help drive up savings rates: Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by one percent of their salary either annually or when they receive a raise, until such a time when they choose to discontinue the increases," said Collinson.
2. Incorporate professionally managed services and asset allocation suites
Professionally managed services such as managed accounts, and asset allocation suites, including target date and target risk funds, have become staple investment options offered by plan sponsors to their employees. These options enable plan participants to invest in professionally managed services or funds that are essentially tailored to his/her goals, years to retirement, and/or risk tolerance profile.
Eighty-four percent of plan sponsors now offer some form of managed account service and/or asset allocation suite, including:
56 percent offer target date funds that are designed to change allocation percentages for participants as they approach their target retirement year; 54 percent offer target risk funds that are designed to address participants' specific risk tolerance profiles; and, 64 percent offer an account (or service) that is managed by a professional investment advisor who makes investment or allocation decisions on participants' behalf.
"For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution. However, it is important to emphasize that plan sponsors' inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks, and fees to their plan participants," said Collinson.
3. Add the Roth 401(k) option to facilitate after-tax contributions
"Roth 401(k) can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age," said Collinson. The Roth option enables participants to contribute to their 401(k) or similar plan on an after-tax basis with tax-free withdrawals at retirement age. It complements the long-standing ability for participants to contribute to the plan on a tax-deferred basis. Plan sponsors' offering of the Roth 401(k) feature has increased from 19 percent in 2007 to 52 percent in 2014.
4. Extend eligibility to part-time workers to help expand retirement plan coverage
"Expanding coverage so that all workers have the opportunity to save for retirement in the workplace continues to be a topic of public policy dialogue. A tremendous opportunity for increasing coverage is part-time workers," said Collinson. Only 49 percent of 401(k) or similar plan sponsors say they extend eligibility to part-time workers to save in their plans.
"Employers should consider consulting with their retirement plan advisors and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement," said Collinson.
5. Address any disconnects between employers and workers regarding benefits and preparations
The survey findings revealed some major disconnects between employers and workers regarding retirement benefits and preparations. For example: Ninety-five percent of employers that offer a 401(k) or similar plan agree that their employees are satisfied with the retirement plan that their company offers; yet, in stark contrast, only 80 percent of workers who are offered such a plan agree that they are satisfied with their employers' plans.
"Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness," said Collinson. Just 23 percent of employers have surveyed their employees on retirement benefits and even fewer workers (11 percent) have spoken with their supervisor or HR department on the topic in the past year.
United States: You've Acquired A New Qualified Retirement Plan? Time For A Compliance Check
Originally posted October 20, 2014 by Nancy Gerrie and Jeffrey M. Holdvogt of Mondaq Business Briefing, on www.ifebp.org.
In connection with a merger or acquisition, an acquiring company may end up assuming sponsorship of a tax-qualified retirement plan that covers employees of the acquired company. Basic due diligence on the plan likely was done during the acquisition. But if the plan will continue to be maintained following the acquisition, this is the perfect time to establish procedures to ensure that the numerous administrative and fiduciary requirements involved in maintaining a qualified retirement plan will continue to be met on an ongoing basis. Following is a brief summary of some key issues that a company should focus on after it assumes a new qualified retirement plan.
Review Compliance with Coverage and Nondiscrimination Testing
In order for the plan to retain its tax-qualified status, the Internal Revenue Code requires that a qualified retirement plan be tested periodically to ensure that it does not discriminate in favor of highly compensated employees. Two of the most important tests to be monitored are: (i) the coverage test, to ensure that the plan covers a stated minimum number of non-highly compensated employees on a controlled group (employer-wide) basis, and (ii) the nondiscrimination test, to ensure that the formula for determining the amount of contributions and benefits a particular participant receives does not discriminate in favor of highly compensated employees. Advance planning should be done to determine the impact of the acquisition on these tests, both for the new plan and any existing plans within the controlled group. Different rules may apply for determining which employees are highly compensated, depending on the type of transaction.
Become Familiar with the Plan's Investments and Investment Policy
The acquiring company, or more typically a committee appointed by the acquiring company, will have fiduciary responsibility for selecting the plan's investments, including the investment funds offered under a 401(k) or other individual account retirement plan. Plan fiduciaries, who likely will be newly appointed following the acquisition, must familiarize themselves with the fund lineup, obtain information to evaluate the funds and document how they monitor and select funds to ensure compliance with U.S. Department of Labor requirements. Plan fiduciaries also should familiarize themselves with the plan's written investment policy or guidelines, refer to the investment policy or guidelines when meeting to discuss changes to plan investments and update the policy or guidelines, as needed.
Understand Plan Fees and Revenue Sharing
New plan fiduciaries should carefully review any revenue-sharing arrangements related to the plan and understand the plan's use of so-called "12b-1 fees" and other revenue-sharing payments. Plan fiduciaries must understand the formula, methodology and assumptions used to determine the respective share of any revenue generated from plan investments by the plan's service provider. Plan fiduciaries also must monitor the arrangement and the service provider's performance to ensure that the revenue owed to the plan is calculated correctly and that the amounts are applied properly (for example, for payment of proper plan expenses or for reallocation to participants' plan accounts).
Review Consultant, Investment Manager and Service Provider Agreements
Qualified retirement plan fiduciaries typically have agreements with various consultants, investment managers and service providers that carry over following an acquisition. This is a good time to review these agreements, both to understand the service providers (and whether they are still needed) and to make sure plan fiduciaries are set up to properly monitor and select new service providers, as needed. In particular, plan fiduciaries should understand whether the consultant or advisor represents itself to be a fiduciary or co-fiduciary of the plan, whether the consultant or advisor maintains adequate insurance coverage, whether fees are reasonable and whether any conflicts of interest exist.
Ensure the Plan's Eligibility Provisions Reflect the New Controlled Group
The plan document will specify precise rules for employee eligibility. Following an acquisition, the acquiring company often must update the plan's eligibility provisions to reflect the new controlled group. In addition, with new administrators and new human resources personnel likely to be looking at the plan, this is an ideal time to make sure the plan is following the eligibility and enrollment rules set forth in the plan document, including: (1) eligibility for or exclusion of part-time employees; (2) proper classification of independent contractors; (3) adherence to hours-of-service counting rules or the elapsed-time alternative; (4) re-enrollment of rehired participants; and (5) for automatic enrollment plans, proper automatic enrollment for eligible employees on a timely basis.
Check the Plan's Definition(s) of Compensation
A plan's definition of compensation is used for a variety of important purposes, including the calculation of an employee's allocation in a defined contribution plan or benefit accruals in a defined benefit plan, adherence to limitations on allowable compensation and performing nondiscrimination testing. The plan document must specify precise definitions for applicable compensation for each purpose. Problems frequently arise following an acquisition because the payroll provider may change or key personnel who understood how compensation was applied under the plan may be gone. Also, the transaction agreement may require the continuation of certain benefit levels for a period of time, which in practice may require that the plan continue to apply the same definition of eligible compensation as before the transaction. Plan administrators should review payroll codes against the plan's definition of compensation and make adjustments to either the plan or the payroll codes, as needed.
Review the Distribution Paperwork
The acquiring company will usually update the plan's summary plan description and employee communications to reflect the new employer. However, distribution paperwork, including benefit election and rollover forms that the employee must complete, as well as descriptions of optional forms of benefits and other required disclosures, is often overlooked in the due diligence and transition process. If election forms are not periodically reviewed and updated, the plan may fail to provide all the correct options (for example, installments, annuities and lump sums, where available) or fail to require spousal consent for distributions, where it is required under plan rules.
Update ERISA Fidelity Bonds and Fiduciary Insurance Coverage
One of the most common failures noted by the Department of Labor during audits is a plan's maintenance of an Employee Retirement Income Security Act (ERISA) fidelity bond. ERISA generally requires that every fiduciary of an employee benefit plan and every person who handles funds or other property of such a plan be bonded (for at least 10 percent of the amount of funds he or she handles, subject to a $500,000 maximum per plan for plans that do not hold employer securities) to protect from risk of loss due to fraud or dishonesty on the part of persons who "handle" plan funds or other property. The period after an acquisition is an excellent time to make sure the plan maintains appropriate bonds, as well as to make sure the company is adequately protected with fiduciary insurance coverage, which may be with the same insurer as the fidelity bond.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Is it time for a checkup for your client's 401(k) plan?
As we approach the end of the plan year for most plans, now is a good time for plan administrators and plan sponsors to give their 401(k) plans a quick once over to see if everything is properly in place. The IRS even provides a 401(k) plan checklist with some suggested corrective mechanisms that can be taken to bring plans into compliance.
A good starting place for a compliance tune up is to see if you can answer some basic questions about your plan:
- Who are the trustees?
- Who is the plan administrator?
- Who are the outside service providers and how often are they contacted?
- What are the plan’s eligibility rules and who is responsible for verifying them?
- How are participants notified of eligibility?
- How is plan documentation distributed?
- Where are the plan records kept?
- Who is responsible for preparing and filing the form 5500?
After you get past these, some basic questions about plan administration come into play:
- Who keeps track of contributions and limits?
- How does the plan define “compensation”?
- What is the vesting schedule?
- Are there required contributions from the employer?
- Who is responsible for the discrimination testing?
- Does the plan permit loans and how are they tracked?
- Who is responsible for reporting to participants?
- How are distributions made and who is the contact person?
The reason I bring this topic up is that I was recently working with a client who had one person who was solely responsible for benefit administration. Unfortunately that person passed away suddenly and no other person in the organization could answer any questions about the 401(k) plan. Although it seems like the above information is simple to collect, the company still spent hours and hours recreating the plan history because they neglected to keep a record of how the answers to these questions had changed over the years.
Think of your 401(k) plan as a well maintained car. It needs a check up on a regular basis to keep running smoothly. You have to keep records of what was done and you have to know where the important information is if you need it. Just like your car, you hope your 401(k) plan never breaks down. But in anticipation of a future problem, it is worthwhile to stop and make a record of the responsibility for plan administration and the current status of the plan. That way it will be easier to make repairs if they ever become needed.
5 tips to make retirement education meaningful
Originally posted on https://eba.benefitnews.com.
Through the use of education and communication, employers and benefit advisers can have a huge impact on their employees’ retirement readiness. Making that education meaningful, however, is key to employee engagement and understanding. Here are five tips from Grinkmeyer Leonard Financial and investment advisers with Commonwealth Financial Network on how to make retirement education meaningful.
1. Paint a picture of their "future self"
Employees who can envision their future selves are more likely to understand their financial needs during retirement. The advisers with Commonwealth Financial Network suggest one strategy for embracing your future self is to have employees envision not only their financial retirement goals, but also lifestyle retirement goals. By forcing today’s self to recognize how he or she will look in the future, employees are more likely to save for that future, they say.
2. Help them plan for an achievable number
For too long the financial services industry has focused on the daunting pot of money people should accumulate in order to retire, the advisers say, adding that breaking the number down to monthly saving increments is less scary and seems more achievable to employees.
3. Account for health care
A 2013 study conducted by Fidelity's Benefits Consulting Group estimated that out-of-pocket health care costs for a 65-year-old couple with no employer-provided retiree health care will be $220,000, assuming a life expectancy of 17 years for the man and 20 years for the woman. As part of a comprehensive financial education plan, the Commonwealth Financial Network advisers say it is imperative that medical and insurance costs be incorporated into the retirement planning discussion.
4. Start 'em young
The power of compounding interest is evident in retirement plan balances, the advisers say, adding that evidence has shown the benefits of starting to save at a young age. Interest adds up over time, so even starting to save at 30 instead of 40 can save exponentially more money.
5. Keep the message relatable
Paramount to the success of any education strategy is using simple terms and relatable examples to illustrate potentially complex issues, the advisers say. For example, telling a group of participants that inflation will erode the buying power of their dollar over the entirety of their retirement may be lost in translation, they say. But telling that same group of participants that the $5 sandwich they enjoy today will cost $22.93 in 30 years will likely keep their eyes from glazing over.
Why employees need 401(k) investment advice
Originally posted August 21, 2014 by Michael Giardina on https://ebn.benefitnews.com
This retirement disconnect is not surprising, according to Schwab Retirement Plan Services, which released a survey this week of more than 1,000 401(k) plan participants. “We often see that participants are hesitant to take action when they’re not completely comfortable with the matter at hand, and this is especially true when it comes to financial decisions,” says Steve Anderson, head of retirement plan services at Charles Schwab.
Aside from health coverage, the survey found nearly 90% of workers agreed that the 401(k) is a “must-have” benefit, more than extra vacation days or the ability to telecommute. However, employees said they spent more time researching options for a new car (about 4.3 hours) or vacations (about 3.8 hours) than researching their 401(k) investment choices (2.1 hours).
“The fact that an overwhelming majority of workers demand 401(k)s is good news, because it shows that people understand that they are responsible for their own retirement,” Anderson tells EBN. “Participating in a 401(k) program helps workers develop the discipline to save, and the earlier they begin to save, the more prepared they will be for retirement.”
Meanwhile, about half of plan participants said that their defined contribution plan’s investment options can be more confusing than their health benefits options. But gaining the needed assistance to understand the real value of their retirement plan was not top-of-mind for employees, as respondents said they were more likely to hire someone to perform an oil change to their vehicle, landscape their yard or help with their taxes than to seek out assistance for their 401(k) investments.
Anderson adds that while educational resources from plan sponsors may be just what employees need to make sound investment decisions, he says that “if participants have to seek out these resources on their own, chances are they won’t utilize them to their full benefit.”
Even with the prevalence of auto-enrollment and auto-escalation, employers may still have to do more. Only one-quarter of employees with access to professional 401(k) advice report having used it, says Anderson.
“Now employers can take the next step in plan design by proactively delivering advice to their employees,” Anderson explains. “We know getting advice can make a big difference for workers, as we’ve witnessed the impact of 401(k) advice on participant outcomes.”
For example, 70% of respondents noted that they would feel extremely or very confident in their investment decisions if they used a financial professional. Meanwhile, only 39% highlight the same confidence level if they opted to make those investment choices themselves.
“Participants who receive advice save more, are better diversified and stay the course in times of market volatility,” Anderson explains.
7 more retirement and annuity facts you should know
Originally posted August 8, 2014 by Warren S. Hersch on https://www.lifehealthpro.com
How many women and Gen-Xers have calculated how much money they will need to retire? To what extent does working with a financial advisor increase individuals’ retirement confidence? What are the tax implications of boomers who are retiring later, saving more and planning better?
Answers to these questions, among many others, are forthcoming in the Insured Retirement Institute’s “IRI Fact Book 2014.” The 198-page report, an all-encompassing guide to information, trends and data in the retirement income space, explores the state of the industry, annuity product innovations, and solutions for generating immediate and future income needs.
The report also details consumer use and attitudes towards annuities, spotlights trends among baby boomers and generation X women, examines boomer expectations for retirement this year, and delves into the regulation and taxation of annuities.
Fact 1: Three-quarters (75 percent) of households that own fixed annuities claim balances of less than $100,000, while 68 percent of variable annuity owners report balances below $100,000.
For households with between $500,000 and $2 million in investable assets – the sweet spot for advisors serving the “mass affluent market,” more than a quarter have a fixed annuity balance of $1-$19,000 (28.1 percent) or $20,000-$49,000 ($24.4 percent)
Others with investable assets between $500,000 and $2 million have the following fixed annuity balances:
● $50,000-$99,999: 8.7 percent of owners
●$100,000-$299,999: 15.5 percent owners
● $300,000-$499,999 3.2 percent of owners
● $500,000-plus: 0 percent of owners
Fact 2: Nearly half of households (43 percent) cite guaranteed monthly income payments as the primary reason for purchasing an annuity.
This fact holds true, the report states, among investors with less than $2 million in investable assets. Investors owning investable assets between $2 million and $5 million place the greatest importance on potential account growth (41 percent). The wealthiest investors value insuring portions of their assets (39 percent).
Households with $2 million to 5 million in investable assets cite the following reasons for purchasing a variable annuity:
● 33.7 percent: To generate a guaranteed payment each month in retirement.
● 41.0 percent: To provide a potential for account growth.
● 35.5 percent: To receive tax-deferral on earnings in the annuity.
● 30.7 percent: To provide diversification by adding another type of investment to the portfolio.
● 32.2 percent: To protect assets by insuring a minimum value of payments from the account.
● 17.4 percent: To set aside assets for heirs.
● 16.7 percent: To exchange an old annuity for a new one.
● 5.6 percent: Not sure why I purchased an annuity.
Fact 3: The economy has had a detrimental effect on retirement savings and planning for many women.
The report indicates that few women are confident that they will have enough retirement savings or that they have done a good job preparing financially for retirement.
● 51 percent of Boomer women and 57 percent of Gen-X women have weak or no confidence that they will have enough money to live comfortably in retirement or are unsure.
● Significant numbers of both Gen-X and Boomer women (69 percent and 46 percent, respectively) have not attempted to calculate how much they will need to retire.
● Though expecting personal savings to be a significant source of retirement income, only half of Boomer women with savings have $200,000 or more in retirement savings. And only one-quarter of Gen-X women have $100,000 or more saved for retirement.
● Fewer than half have worked with a financial advisor to plan for their retirement. Those who do seek an advisor report that retirement planning is a top reason.
Fact 4: Working with a financial advisor greatly increases retirement confidence.
● Among those who consult with a financial advisor, 73 percent feel very or somewhat prepared for retirement compared with 43 percent of those who did not.
● Among Boomers who have calculated their retirement savings needs, 44 percent are extremely or very confident compared with 29 percent of those who did not. Among Gen-Xers who completed the calculation, 47 percent are extremely or very confident, compared with 28 percent among those who did not.
● Annuity owners have higher levels of retirement confidence. Among boomers who own an annuity, 53 percent are extremely confident, compared with 31 percent who do not. Among Gen-Xers who own an annuity, 49 percent are extremely or very confident, compared with 31 percent among those who do not.
● 7 in 10 Boomer and 6 in 10 Gen-Xer annuity owners have completed a retirement savings needs calculation. This compares with 44 percent of Boomers and 34 percent of Gen-Xers who do not own an annuity.
● Nearly three-quarters (74 percent) of Boomer and 62 percent of Gen-Xer annuity owners have consulted with a financial advisor. This compares with 35 percent of Boomers and 30 percent of Gen-Xers who do not own an annuity.
Fact 5: Boomers are showing some optimism that their financial situation will improve during the next five years.
The report reveals also that boomers are retiring later, saving more and planning better.
- A quarter of Boomers postponed their plans to retire during the year past.
● 28 percent of Boomers plan to retire at age 70 or later.
● 80 percent of Boomers have retirement savings, with about half having saved $250,000 or more.
● 55 percent of Boomers have calculated a retirement savings goal, up from 50 percent in 2013.
Tax policy implications and positive actions
● Three in four Boomers say tax deferral is an important feature of a retirement investment.
● Nearly 40 percent of Boomers would be less likely to save for retirement if tax incentives for retirement savings, such as tax deferral, were reduced or eliminated.
● Boomers planning for retirement with the help of a financial advisor are more than twice as likely to be highly confident in their retirement plans compared to those planning for retirement on their own.
Fact 6: Most advisors (71 percent) have increased the net number of retirement income clients served during the year past.
The report shows that 60 percent of advisors have modestly increased their net number of retirement income clients, while 11 percent have significantly increased the number. An additional 28 percent and 2 percent, respectively, experienced no change or decreased their retirement income clientele.
The research adds nearly 6 in 10 (58 percent) advisors describe as well developed the processes and capabilities they’ve established for their retirement income clients. An additional 37 percent of advisors believe they have some but not all of the needed processes and capabilities.
Nine in ten advisors say that enhancing their retirement income processes and capabilities is a “priority.” For a majority, the priority level is high (54 percent). Fewer advisors describe the priority level as moderate (37 percent) or low.
Fact 7: Advisors generally rely on a combination of four major investment product categories for retirement income clients: mutual funds, ETFs, variable annuities and fixed income annuities.
For 1 in 3 advisors, all four categories are used in combination. About 2 in 9 advisors use mutual funds, ETFs and variable annuities. Other grouping include mutual funds and variable (1 in 8 advisors), income annuities (1 in 11 advisors), plus mutual funds and ETFs (1 in 12 advisors).
The following is a percentage-based breakdown of the most typical product combinations:
● 38 percent –Fund/ETF/FA/Fixed
● 22 percent –Fund/ETF/VA
● 8 percent—Fund/ETF
● 5 percent—Fund only
● 12 percent—Fund/VA
● 9 percent—Fund/VA/Fixed
Include health care cost in plans
Originally posted August 3, 2014 by Redding Edition on https://www.ifebp.org
The possibility of having to pay major health care costs in the future is a primary concern of planning for retirement these days. Is there some way to plan for these expenses years in advance?
Just how great might those expenses be? There’s no rote answer, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.
For the last eight years, Fidelity has projected average retirement health care expenses for a couple — assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other. In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 just to absorb those future health care costs.
When it asked Americans ages 55 to 64 how much money they thought they would spend on health care in retirement, 48 percent of the respondents figured they would only need about $50,000 each, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.
AARP posed this question to Americans ages 50 to 64 in the fall of 2013. The results were 16 percent of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42 percent figured needing less than $100,000.
Another 15 percent admitted they had no idea how much they might eventually spend for health care. Not surprising, just 52 percent of those surveyed felt confident that they could financially handle such expenses.
Prescription drugs may be your No. 1 cost. EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75 percent probability of paying off 100 percent of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.
What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.
The main message is save more and save now. Do you have about $200,000 after tax saved for future health care costs? If you don’t, you have yet another compelling reason to save more money for retirement.
Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare only covered about 62 percent of retiree health care expenses. While private insurance picked up another 13 percent and military benefits or similar programs another 13 percent, that still left retirees on the hook for 12 percent out of pocket.
Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids — and it certainly doesn’t pay for extended long-term care.
Medicare’s yearly Part B deductible is $147 for 2014. Once you exceed it, you will have to pick up 20 percent of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium is at $104.90 this year, which comes out of your Social Security. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger. The threshold for a couple is $170,000. Part D premiums for drug coverage can also vary greatly. The greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums each year is only wise.
Takeaway: Staying healthy may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96 percent of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77 percent of that end salary — about $61,600 — to cover 100 percent of annual retirement expenses.
Average worker needs to save 15% to fund retirement
Originally posted July 22, 2014 by Nick Thornton on https://www.benefitspro.com
A typical household needs to save roughly 15 percent of their income annually to sustain their lifestyle into retirement, according to a brief from the Center for Retirement Research at Boston College.
Generally, workplace retirement savings plans should provide one-third of retirement income, according to the study. For lower income families, defined contribution or defined benefit plans should provide a quarter of all retirement income. Higher income families will need their retirement plans to provide about half of all retirement income.
Middle-income families will require 71 percent of pre-retirement income to maintain living standards after they leave the workforce. About 41 percent of their retirement income is expected to come from social security.
Low-income families need an annual savings rate of 11 percent in order to sustain their lifestyle into retirement, which is lower than middle-income families (15 percent) and high-income families (16 percent). For lower income families, social security will replace a greater portion of pre-retirement income.
The Center’s National Retirement Risk Index says that half of Americans lack adequate savings to maintain their standard of living into retirement. A “feasible increase” in savings rates by younger workers can greatly affect their retirement wealth.
For those middle-income workers ages 30 to 39 who lack enough savings, a 7 percent increase in annual savings can provide adequate retirement funding. But middle-income workers age 50 to 59 who lack retirement savings would have to increase their annual savings rate by 29 percent, an unlikely expectation, the report adds.
For those older workers behind the curve, a better funding strategy would be “to work longer and cut current and future consumption in order to reduce the required saving rate to a more feasible level.”
Delaying retirement to age 70 greatly reduces the annual savings expectations workers need to meet in order to fund retirement.
A worker who starts saving at age 35 will need a 15 percent annual savings rate in order to retire at age 65. But if the same worker delays retirement until age 70, only a six percent annual savings rate is necessary.
A worker who starts saving at age 45 would need to save 27 percent annually to retire at 65. But by delaying retirement to age 70, the same worker only has to save 10 percent to maintain their standard of living after retirement.