Plan Now to Celebrate National Employee Benefits Day on April 2nd
Originally posted on https://www.ifebp.org/
According to the Employee Benefits Research Institute, almost nine in ten people don’t think they’ll have enough saved when they get to retirement. Study after study provides data pointing to the same conclusion: A crisis is coming. Are your plan participants prepared for it?
This year, the focus of National Employee Benefits Day is to increase awareness of the retirement crisis, and to help plan sponsors motivate participants to actively engage in their financial wellness.
To help make financial wellness more urgent for your participants, we have created a number of resources that will help cut through the clutter and provide simple tools to get them thinking about their future.
Get started with these helpful handouts that explain key terms for: Retirement Plans [PDF],Investments [PDF] and Credit [PDF].
4 Retirement Mistakes 30-Somethings Make -- And How They Can Avoid Them in 2014
Originally posted by Nancy Anderson on https://www.forbes.com
Any wise financial planner knows to get a second opinion on her own retirement plan. So I wasn’t surprised when a 30-year-old colleague asked me to be her second look, and I gave her my opinion freely.
As you’d expect from a Certified Financial Planner ™ professional, she had her basics down. She had an emergency fund with six months of her net income, no credit card debt, and she was on track to replace her income in retirement. In fact, at the rate she is going, she will replace over 100% of her income in retirement. When I reflected on our meeting later, I wondered why more 30-year-olds aren’t as prepared as she is.
But then I realized that she is in the industry, and is not making a lot of false assumptions that other younger people make. Decisions based on the wrong information can lead to costly mistakes, and the results could be as serious as having to delay retirement or living on a reduced income later.
Here are four false assumptions that a lot of people in their 30s make—and ways to help them to stay on the right track for retirement.
1. They assume it will be easier to save in the future. The truth is that your 30s can be an expensive decade. Many people are establishing a household, having children and buying a home, along with all the furnishings that go in it. So it may actually be more difficult to save in your 30s than in your 20s. My colleague started saving the absolute maximum she could in her late 20s, knowing that she wanted a house and family someday. She figured, correctly, that even though her income might grow exponentially in her 30s, her expenses might surpass her income.
Tip for 30-somethings: Seriously consider maximizing retirement savings earlier in your career, knowing that you may have gaps in savings in the future.
2. They don’t verify that they are on track for their retirement goals. My colleague runs her own retirement calculations all the time. She wanted a second set of eyes to see what she might be missing, as well as some high-level strategies. According to recent research from BlackRock BLK +1%, more than 4 in 10 people surveyed weren’t saving because they hadn’t run retirement calculations and didn’t know how much they needed to save. But almost 8 in 10 said they would start saving or increase their contributions if they knew how much they needed to save. Since the new model of retirement planning consists of employees managing their own retirement with a defined contribution plan, it’s important to be proactive.
Tip for 30-somethings: At a minimum, run a retirement calculation. Some calculators to get you started and here and here. Meeting with a Certified Financial Planner ™ professional can be one way to get started on your financial plan. Some resources that can help include Let’s Make a Plan andLearnVest (use discount code Retire50).
3. They assume the 401(k) is the “be all, end all.” There are major benefits to investing in an employer’s retirement plan. First of all, you can never underestimate the value of automatically deducting funds from a checking account. When funds are invested before ever hitting your bank account, you simply can’t spend that money. And company-matching contributions are obviously a significant benefit. Employees who receive a company match should invest at least up to the matching contributions in their 401(k).
But don’t ignore the Roth IRA. The tax-free retirement benefit of the Roth is well known, but many folks may not realize how much flexibility the Roth has. The principal amount can be withdrawn for any reason and at any time, without a tax penalty. This serves as a back-up emergency fund, but also gives an investor flexibility to reinvest the principal into something else, such as a down payment on a primary residence or on an investment property. For someone in his or her 30s, a Roth IRA can be the best of both worlds: Investing for retirement and having some flexibility to withdraw the principal without hefty taxes. (A Roth investment is post-tax; meanwhile, a 401(k) carries a 10% early withdrawal penalty.)
Tip for 30-somethings: It can be wise to invest in the 401(k) up to the amount matched by your company. Over and above the company match, consider investing in a Roth IRA.
4. They assume all funds are created equal. Albert Einstein is rumored to have said that compound interest is the most powerful force in the universe. Compounding fees, on the other hand, are another story. When you pay high annual fees on the funds in your retirement accounts, the compounding works against you. For example, an investor with a $50,000 balance who pays 1.5% in annual investment fees on an account that earns 7% annually would pay about $138,000 in total expenses over 30 years, including opportunity costs. Everything else being equal, that same investment with fees at 0.5% would only incur about $53,000 in total expenses and opportunity costs. Something as seemingly insignificant as a 1% difference in annual fees can add up to an $85,000 difference over time.
Tip for 30-somethings: Think about investing in low-fee mutual funds or index funds in your 401(k). See your fund’s prospectus for full disclosure on fees. Click here to see how expenses impact mutual fund returns, as calculated by calcxml.com.
Albert Einstein also said that anyone who has never made a mistake has never tried anything new. But frankly, in terms of retirement planning, it’s better to start off strong by not making mistakes in the first place. If you really want to try something new, there’s always hang gliding.
Gen Xers post biggest gap in life insurance coverage
Originally posted September 23, 2013 by Margarida Correia on https://ebn.benefitnews.com
What people say doesn’t always align with what they do. Such is the case with life insurance, a study commissioned by New York Life finds.
According to the study, most Americans don’t buy enough life insurance to secure the level of protection they say they would want for their families if they were to die. The average American registered an insurance shortfall of $320,000.
Generation Xers posted the biggest gap of any age group. Although average Gen Xers said they would want their life insurance policies to cover $708,996, they purchased only $260,000 in coverage, creating a coverage gap to $448,996. Millennials and baby boomers, in contrast, had gaps of $370,744 and $267,016, respectively.
The gap has widened substantially for Gen Xers since the financial crisis. From 2008 to 2013, the amount of life insurance coverage they have in place fell 35% to $260,000 from $400,000. The gap impacts more than half (56%) of Gen Xers, according to the study.
“Gen Xers have been severely impacted by the economic downturn and the gap is a clear indication of what is at risk. Gen Xers, who may be focused on financial obligations that have to do with their children, their home, planning for retirement and maybe even taking care of their elderly parents, are lacking a foundation of financial protection that life insurance provides,” says Chris Blunt, president of the Insurance Group at New York Life.
The study is based on two separate surveys, both of which polled 1,000 Americans age 25 and over with dependents and annual household incomes of at least $50,000. One survey was conducted online by The Futures Company from April 24 – May 1, 2013. The other was conducted by Greenwald & Associates via telephone in May 2008.
Employers pushing hard for lower 401(k) fees
Originally posted December 05, 2013 by Dan Cook on https://www.benefitspro.com
Just as they are combing through health plans looking for cost-cutting opportunities, so are employers trimming the fat off employee 401(k) plans. However, in general, they are attempting to do so without sacrificing investment quality. Plans with lower fees have become popular, as have those that offer participants more options, some of which combine lower fees with solid returns.
All of these observations come to us fresh from an Aon Hewitt survey of 400 defined contribution plan sponsors. Their plans cover more than 10 million employees with a total of $500 billion in retirement assets. These sponsors were asked about their retirement benefits strategies, plan designs and investment structures.
When last asked about such matters in 2007, just more than half of the respondents said they were working to reduce fund or plan expenses. This time around, more than three-quarters said they looking for ways to cut such costs.
The most common methods for doing so were switching share classes to less costly alternatives (62 percent) and swapping out funds for lower-cost alternatives (50 percent).
The survey identified lower fees are the No. 1 reason for choosing fund options. Other top factors included historical investment performance and fund investment process. Once powerful factors such as name recognition and availability in public sources were no longer seen as priorities.
“One of the most direct ways to increase participant balances is to increase their returns, which can be done effectively by decreasing investment fees without sacrificing investment quality,” said Rob Austin, director of Retirement Research at Aon Hewitt. “Even small changes in 401(k) fees can have a significant impact on employees’ nest eggs over time. For example, decreasing fees from 1 percent to 0.75 percent per year has the same effect on a typical participant as contributing an additional 0.50 percent of pay. This ultimately translates into thousands of dollars more in retirement savings.”
Other highlights from the Aon survey:
More than 90 percent of employers offered non-mutual fund alternatives — such as collective trusts and separate accounts — in their 401(k) menus, compared to 59 percent in 2007.
44 percent chose these alternatives as their primary fund options in 2013, compared to just 19 percent in 2007.
30 percent offered plan participants emerging market funds this year, compared to 15 percent in 2007.
14 percent offers participants short-term bond funds, compared to 8 percent in 2007.
Another trend spotted by the survey: Large increases in the index approach were found in mid-cap equity (59 percent in 2013 vs. 42 percent in 2011), intermediate bond (53 percent in 2013 vs. 42 percent in 2011), and international equity (50 percent in 2013 compared to 31 percent in 2011).
2014 Annual Benefit Plan Amounts
Originally posted on www.shrm.org The Internal Revenue Service announced on Oct. 31, 2013, cost-of-living adjustments for tax year 2014, also charted here and here, that apply to dollar limits for 401(k) and other defined contribution retirement plans and for defined benefit pension plans. Some plan limits will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment, while other limits will rise in 2014.
The announcement highlighted the following:
- 401(k), 403(b) and profit-sharing plan elective deferrals in 2014 will remain at $17,500; the catch-up contribution limit will stay at $5,500.
- The annual defined contribution limit from all sources will rise to $52,000 from $51,000.
- The amount of employee compensation that can be considered in calculating contributions to defined contribution plans will increase to$260,000 from $255,000.
- The limit used in the definition of a highly compensated employee for the purpose of 401(k) nondiscrimination testing remains unchanged at$115,000.
| Defined Contribution Plan Limits For 401(k), 403(b) and most 457 plans, the COLA increases for dollar limits on benefits and contributions are as follows: |
2014 |
2013 |
| Maximum elective deferral by employee |
$17,500 |
$17,500 |
| Catch-up contribution (age 50 and older during 2012) |
$5,500 |
$5,500 |
| Defined contribution maximum deferral (employer and employee combined) |
$52,000 |
$51,000 |
| Employee annual compensation limit for calculating contributions |
$260,000 |
$255,000 |
| Annual compensation of “key employees” in a top-heavy plan |
$170,000 |
$165,000 |
| Annual compensation of “highly compensated employee” in a top-heavy plan (“HCE threshold”) |
$115,000 |
$115,000 |
“A $1,000 increase to the overall defined contribution limit will allow participants to potentially get a little more ‘bang’ out of their plan—at least if their employer wants to give them more money,” noted retirement-planning firm Van Iwaarden Associates in an online commentary on the 2014 changes. Defined Benefit Plans
- The maximum annual benefit that may be funded through a defined benefit plan will increase to $210,000 from $205,000.
- For a participant who separated from service before Jan. 1, 2014,the limit for defined benefit plans is computed by multiplying the participant’s compensation limit, as adjusted through 2013, by 1.0155.
“The primary consequence of this change is that individuals who have very large DB benefits (say, shareholders in a professional firm cash balance plan) could see a deduction increase if their benefits were previously constrained by the [Internal Revenue Code Section 415] dollar limit,” the Van Iwaarden posting explained. Other Workplace Retirement Plan Limits
- For SIMPLE (savings incentive match plan for employees of small employers) retirement accounts, the maximum contribution limit will remain $12,000; the catch-up contribution limit will also stay the same, at$2,500.
- For simplified employee pensions (SEPs), the minimum compensation amount will remain $550, while the maximum compensation limit will jump to $260,000 from $255,000.
- In an employee stock ownership plan (ESOP), the maximum account balance in the plan subject to a five-year distribution period will rise to$1,050,000 from $1,035,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase to$210,000 from $205,000.
| Non-401(k) Workplace Retirement Plan Limits |
2014 |
2013 |
| SIMPLE employee deferrals |
$12,000 |
$12,000 |
| SIMPLE catch-up deferrals |
$2,500 |
$2,500 |
| SEP minimum compensation |
$550 |
$550 |
| SEP annual compensation limit |
$260,000 |
$255,000 |
| Social Security wage base |
$117,000 |
$113,700 |
Individual Retirement Accounts
- The limit on annual contributions to an individual retirement account (IRA) will stay at $5,500. The additional catch-up contribution limit for those ages 50 and over will remain $1,000.
- The deduction for taxpayers making contributions to a traditional IRA has been phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGIs) from $60,000 to $70,000, up from $59,000 to $69,000 in 2013.
- For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the AGI phase-out range will be $96,000 to $116,000, up from $95,000 to $115,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction has been phased out for couples with an AGI from $181,000 to $191,000, up from $178,000 to $188,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and will remain $0 to $10,000.
- For a Roth IRA, the AGI phase-out range for taxpayers making contributions will be $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range will be $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range will remain $0 to $10,000.
- The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers will rise to $60,000 for married couples filing jointly, up from $59,500 in 2013;$45,050 for heads of household, up from $44,250; and $30,000 for singles and married couples filing separately, up from $29,500.
Contribution Misperceptions Hinder Savings Employees often have a skewed perception of retirement plan contribution limits. According to Mercer Workplace Survey results, the average participant believes that the tax-deferral limit is only $8,532, just under half the actual 2013 limit of $17,500. Looking at intended savings rates, most appear close to the perceived limit but are still far off from the actual. For those nearing retirement (age 50-plus), the perception gap is even bigger. The survey represents a national cross section of active 401(k) participants; online interviews were completed with 1,506 respondents between May 28 and June 5, 2013.
|
By Age: Actual Contribution vs. Perceived Contribution Limit (Average $) Respondents were asked, “As far as you know, what is the maximum dollar amount you can defer from income taxes this year by contributing it to a 401(k)?,” and “Not counting any contributions your employer may make to your 401(k) plan over the next 12 months, how much money, if any, do you expect to put into your 401(k) plan?” (click on chart to view enlargement) Source: Mercer Workplace Survey, 2013. |
“This data not only points to a troubling disconnect between perception and reality but also points to a false sense of security among 401(k) participants,” according to Mercer’s analysts. “It also begs the question whether participants are leaving some tax efficiency—knowingly or unknowingly—on the table.”
Thirty-four percent said they would increase their 401(k) contribution to the tax-deferred maximum “if they could live the last 12 months over again,” the survey found, which highlights the value of effectively communicating maximum contribution limits to employees and conveying how even small annual contribution increases can substantially boost the size of their retirement nest egg.
What really scares us these days
Originally posted October 24, 2013 by Corey Dahl on https://www.lifehealthpro.com
When I was in sixth grade, I went to my first commercial (as in, non-neighbor’s-darkened-basement-strewn-in-cotton-cobwebs-and-paper-bats) haunted house.
It was the ‘90s, the heyday of those cheap, ill-produced FrightFezts and ScReAm ZoNes that sprouted in derelict shopping centers every fall, and you weren’t cool — by middle school standards, anyway — if you didn’t go to at least one. So my friends and I skipped trick-or-treating that year, stood in an hour-long line and paid $10 of our parents’ money to see what all the hype was about.
When we emerged about 15 minutes later, I wished I’d gone trick-or-treating instead. My friends were pumped — screaming and giggling — and, wanting to fit in, I played along. But really, the entire thing had bored me. I mean, toy chain saws? Fog machines? Cheap makeup? Yawn.
Maybe I was just a really jaded 11 year old, or maybe it was just a really crappy haunted house — this was before they became the multi-story productions they are today, after all — but there was nothing in that Hobby Lobby-cum-House of Horrors that scared me in the slightest.
And, while I haven't been to a haunted house since, I don’t think it would be much different for me these days, either. I spend the entirety of slasher movies critiquing plot holes and poor acting. I’m not really into the whole zombie trend. When the electricity goes out, I worry about my frozen foods melting, not a potential ghost attack.
Increasingly, it seems I’m not alone. I read an article last week about the scaring difficulties haunted houses have been facing lately. Despite spending thousands on machines, effects, masks and professional actors, the houses’ operators are watching a lot of their guests walk away unperturbed.
The haunted house operators blamed technology. Better movie and video game special effects have upped the ante considerably, they said. And yeah, okay. Maybe. But as a longtime non-scared, I think the better culprit might be real life.
Because, the more I look back on it, the more I’m convinced that my blasé attitude toward that strip-mall haunted house (and all cheap frights) was entirely due to the fact that I’d seen a lot of things scarier than pimply, dressed-up teenagers jumping out from behind cardboard trees.
By the time I was 11, one of my grandmas had died. The other was in failing health, requiring my mom to juggle nursing home bills and the care of a senior and three daughters.
Our house had been robbed a few years earlier, and they’d run off with my life savings ... which was $20 in an old Folgers coffee can.
And I’d traveled extensively with my somewhat directionally challenged family, which meant we often got lost in the bad neighborhoods of big cities. A homeless man, dressed in nothing but a garbage bag and asking for spare change, had chased me down a street in New York just a few months earlier.
So my lack of fear didn’t come from extraordinary bravery of some kind — I was scared of miller moths until I was well into college — but probably from simply knowing that rubber masks and strobe lights couldn’t hold a candle to most of the things real life had in store.
Following one of our country’s worst economic downturns and given the employment, retirement andlong-term care struggles most Americans continue to face — to say nothing of the real-life tragedies we’ve experienced, from hurricanes, tsunamis, mass shootings and the like — I suspect a lot of other people have started to realize the same. We’re living at a time when you’ll get more screams from people with a bank statement than a bludgeon.
Part of that makes me glad; it’s a sign that we’re finally facing facts, I think. But it’s also incredibly sad, this idea that our reality has outpaced the worst horrors we could previously imagine.
But it doesn’t have to be like this. If my theory’s even slightly correct, I think it also proves the dramatic need for the advice of insurance agents and financial advisors these days. With a suitable plan in place, a lot of people could avoid the real-life horrors of unpaid bills and underfunded retirements.
And the faster producers can ease clients’ worst fears, the sooner they can get back to freaking out over corn-syrup blood. Or, if they’re like me, making fun of it.
Happy Halloween!
With debt ceiling near, employee benefits in the crosshairs
Originally posted October 16, 2013 by Gillian Roberts on https://ebn.benefitnews.com
Wednesday's last-minute negotiations on raising the nation’s borrowing limit could impact 401(k)s, Roth retirement vehicles and more, if similar past showdowns give any indication. Bob Christenson, partner at Fisher & Phillips LLP, says he’s seen these debates on the Hill before and past lessons show that employee benefits could be impacted when the conversation turns to raising revenue through taxes.
“There may be more of a restriction on 401(k) plan contributions because they’ve done that in the past,” says Christenson, of the firm’s Atlanta office. “Everyone talks about limits on Roth contributions and the secret behind all that was — that was a revenue raising measure, too.” He also says he wouldn’t be surprised if lawmakers “tinker” with ways to make distributions on retirement savings vehicles easier because again, that would be a tax increase.
“From an employee benefits policy perspective, it’s not smart … but it’s what’s been done in the past and I wouldn’t be surprised to see it again,” he says.
Bill Sweetnam, principal at Groom Law Group in Washington, agrees that revenue raisers may be part of the equation, but nothing on a large scale. “Early on I would have said if they had done a grand bargain over the summer they could have done something with tax reform, but they don’t have the time for tax reform, so I think the employee benefits world is not going to be impacted unless they’re used as a revenue raiser that people want,” he says.
Sweetnam thinks two things could be on the table for employee benefits at this point:
1) Extending the relief that defined benefit plan sponsors get from MAP-21 interest rates — in other words, “requiring people to make higher funding contributions and thus raise revenue for the government,” he says.
2) Provide relief to multi-employer pension plans, which has been a heavily lobbied topic recently and could be a positive gesture towards benefits in all this.
Christenson says he suspects that with fewer personnel at the Internal Revenue Service, the voluntary compliance program “that a lot of qualified programs use to correct errors” will probably be down. “They’re not going to advertise that they don’t have the usual personnel,” he says. And that also goes for IRS and DOL audits and Employee Benefits Securities Administration investigations as well.
Christenson points out that there was a time when both parties discussed necessary “tweaks” to the Affordable Care Act, but with the polarization in Washington at this point, “the legislative activity of those potential changes that everyone agrees on could get changed,” he says.
Many expect to retire after 70
Originally posted September 13, 2013 by Paula Aven Gladych on https://www.benefitspro.com
The number of Americans who expect to retire by age 65 has dropped dramatically since 1991, while the number who expect to retire after 70 has shot up, according to a report by the Employee Benefit Research Institute.
One-quarter of workers in EBRI’s 2013 Retirement Confidence Survey said that the age at which they expect to retire has changed in the past year, and of those, 88 percent believe their expected retirement age has increased.
Twenty-two percent of all workers said they would postpone their retirement. The reality, however, is that even though those people want to work longer, health issues and their employers could prevent them from doing that.
In 1991, only 11 percent of workers expected to retire after age 65. Now that number is 36 percent, while 7 percent of those surveyed don’t expect to retire at all, according to EBRI.
The number of individuals who thought they could retire before age 65 also has decreased steadily over time.
In 1991, 19 percent of survey respondents thought they could retire before age 60 and 31 percent thought they would retire between ages 60 and 64. In 1998, those numbers were still high at 24 percent and 25 percent respectively.
By this year, only 9 percent of respondents thought they would be able to retire by age 60 and 14 percent thought they could do it by age 64.
Twenty-six percent of respondents said they expected to retire at age 70 or older, up from 9 percent in 1991 and 7 percent in 1998.
The Employee Benefit Research Institute is a private, nonpartisan research institute based in Washington, D.C. It focuses on health, savings, retirement and economic security issues.
Tools to Better Understand Your 401(k)
Originally posted September 11, 2013 by Philip Moeller on https://money.usnews.com
The Lifetime Income Disclosure Act proposed in May seems to have a reasonable objective: help people determine how much retirement income would be produced by their 401(k). For years, financial experts have touted the benefits of helping consumers understand their retirement trajectories. Otherwise, how will they know if they're on the right track to a successful retirement?
Reasonable or not, the legislation has become a perennial in the garden of consumer finance proposals. It gets introduced. Consumer groups applaud it. Investment firms say the goal has merit. Then they raise a host of operational problems in implementing such a law. Leading the list is their opposition to pretty much any government mandate. They prefer voluntary compliance.
[Read: How to Take Control of Your 401(k).]
Fidelity, the biggest provider of retirement accounts, responded last month to U.S. Department of Labor proposals to implement lifetime income disclosure rules: "Information provided in a static format does not promote participant engagement," Fidelity wrote in a letter to the labor department. "As an equally important consideration, the disclosures that would need to accompany the projections and illustrations would greatly add to both the length and complexity of participant statements, increasing the risk of reader disengagement from any of the information provided on the statement."
Please raise your hand along with me if you aren't really sure what this means. In Fidelity's defense, adding any additional required materials to customer statements may produce diminishing returns. Consumers have greeted recent expansions in 401(k) statements – aimed to provide more transparency to account fees and performance – with disinterest.
Many other investment firms also weighed in with their own objections. More fundamentally, exactly what assumptions about future investment returns and rates of inflation should be used in calculating lifetime income projections? What is the ideal or "right" rate of withdrawing assets from a plan during retirement? Even Nobel Prize winners wouldn't agree on such numbers.
What does Washington say? Here is the description provided by the Congressional Research Service of the current version of the proposed law:
"[The Lifetime Income Disclosure Act] requires such lifetime income disclosure to set forth the lifetime income stream equivalent of the participant's or beneficiary's total benefits accrued. Defines a lifetime income stream equivalent of the total benefits accrued as the monthly annuity payment the participant or beneficiary would receive if those total accrued benefits were used to provide lifetime income streams to a qualified joint and survivor annuitant.
"Directs the Secretary of Labor to: (1) issue a model lifetime income disclosure, written in a manner which can be understood by the average plan participant; and (2) prescribe assumptions that plan administrators may use in converting total accrued benefits into lifetime income stream equivalents."
[Read: 3 Highly Personal Threats to Your Retirement.]
Are we all clear on this?
In the interest of plain language – whether driven by government mandate or voluntary industry compliance – employees and retirees with 401(k)s and individual retirement accounts would be better off with clear answers to practical questions. Here are 10 basic retirement plan questions that merit clear and helpful answers, and some tips about trends and where to find answers.
1. Based on your current 401(k) contribution level and investment results, what kind of retirement is in store for you?
The Employment Benefit Research Institute does an annual retirement confidence survey that contains troubling conclusions about the state of retirement prospects for many Americans. The 2013 survey results can be found at https://www.ebri.org/surveys/rcs/2013/.
2. Do you know what your Social Security benefits would be for different claiming ages?
The Social Security Administration has a tool to provide you access to your earnings history and projected benefits at www.ssa.gov/myaccount.
3. Are you saving enough?
Most people should be saving 10 to 15 percent of their salaries, with higher levels needed for those who wait until their 40s to get serious about retirement savings. Yet most people are saving far less.
4. How much money do you have?
Make a date with yourself to spend an hour with your latest plan statement. It may be time very well spent.
5. What are you paying in fees?
Investment management companies have been steadily lowering retirement plan fees in response to sustained criticism and competition from Vanguard and other low-fee investment firms. The Department of Labor has a primer on retirement plan fees at www.dol.gov/ebsa/publications/undrstndgrtrmnt.html.
6. How has your account performed?
See the advice for question #4.
7. How does your 401(k) performance compare with other investment choices you can make within your plan?
This will require more work on your part, but your plan statement and usually your plan's website will include tools to let you look at investment returns of the various funds and other investment choices offered by the plan.
[See: 10 Things to Watch When Interest Rates Go Up.]
8. How does your performance compare with investment results in the plans of other companies?
Check out BrightScope at www.brightscope.com or Morningstar at www.morningstar.com/Cover/Funds.aspx.
9. What is your employer's match policy, how does it compare with industry standards and are you taking full advantage of the match?
Smart401k provides a helpful discussion of employer matches at https://www.smart401k.com/Content/retail/resource-center/retirement-investing-basics/company-match.
10. If you change jobs, what are you going to do with your current employer's 401(k)?
Many people cash in their retirement plans when they change jobs instead of rolling them over into new plans or IRAs. Most of them are making a mistake.
3 obstacles on the road to retirement readiness
Originally posted August 28, 2013 by Robert C. Lawton on https://ebn.benefitnews.com
Participants can be their own worst enemies. Shlomo Benartzi, a leading authority on behavioral finance, has identified the following three obstacles that plan sponsors need to overcome to propel participants successfully down the road to retirement readiness:
1. Inertia
Plan sponsors are probably most familiar with employee inertia. The incorporation of "auto" features — auto-enrollment, auto-escalation and auto re-enrollment — into 401(k) plans, along with the addition of professionally managed investment options like target-date funds, can successfully address employee inertia. Vanguard and The Newport Group report that approximately one-third of the 401(k) plans they administer have auto features. Experts believe that within three to five years the majority of 401(k) plans will adopt these plan design elements.
2. Loss aversion
Loss aversion may be characterized as valuing the avoidance of loss over the accrual of gains. In other words, participants are more afraid of losing money than they are of not having enough money (as a result of investing too conservatively). In order to overcome this obstacle plan sponsors need to offer target-date funds. Most experts believe that 75% to 85% of all plan participants should be invested in target-date funds. When left on their own, participants tend to invest too conservatively to keep pace with inflation, or they are prone to attempt to market time, resulting in significant losses.
Model or lifestyle portfolios aren't a solution here since employee inertia comes into play. Both of these types of professionally managed investment options require a positive employee election to move to more conservative options over time. Target-date funds do not require any employee interaction since the investment manager adjusts the risk level of the portfolio as time goes by.
3. Myopia
Myopia is the hardest factor to overcome. Participants have a tendency to focus on immediate, short-term goals rather than planning for their future. Many participants view the process of saving as difficult and not worthwhile. For example, they may feel that they will be too old to ever enjoy their savings, or they may believe they will pass away before they are able to retire. Regardless of the reason, participants are not eager to fund a future they have a difficult time envisioning. Employee education is the only effective tool to fight myopia.
Plan sponsors who adopt these plan design, investment and employee education elements have a much better chance of seeing their participants achieve retirement readiness.