Are employee purchase programs with payroll deductions a good idea?
By Jason Steed
Source: https://www.pacresbenefits.com
It sounds like a good plan: Offer your current and retired employees discounts on products and services from companies that you have existing business relationships with. Then, arrange for employees to have payroll deductions to help them more easily pay for these items (without finance charges, of course). These types of employee purchase programs are quite active in some companies, giving employees a semi-personalized ‘mall’ of products and services to choose from.
In some cases, these programs provide a solution for employees that cannot get credit for a longed-for big ticket item, do not have all the money on hand for an emergency purchase (such as replacing a broken washing machine) and / or would appreciate a much easier way to buy a new item, like a laptop, for their college student. There is certainly some value for both the company (bringing business to their client helps the client be more successful) and the employee (discounts and payroll deduction make payment much easier) with this arrangement. This benefit also gives employers an extremely low or no cost way to deliver direct value to employees by helping them save money on products and services they may be purchasing anyway – but not necessarily from the company that the employer already has a relationship with.
This seemingly “no brainer” employee benefit does have its downsides. Many employees are already underinsured, some perhaps even living paycheck to paycheck, and some people would argue that employees should never buy anything that they can’t already afford, whether it’s a washing machine or flat screen television.
One interesting question is what participants are actually doing with the savings they can get from these purchase programs. Are employees ever encouraged to then contribute more to their retirement plans or buy insurance or other items that can help them financially down the road? Would having that option or information change the value of a employee purchase program?
With all the discussion recently on the consumer driven healthcare – employees making their own decisions on medical insurance based on their individual / family needs - where do other benefits decisions fall? Should there be other consumer driven benefit options, including employee purchase programs?
Due diligence is a very important part of any benefit product offered to an employee, even these types of non-traditional offers. So why not find a way to integrate them? Given the advances in technology over the last five years, why not educate employees and offer them some valid tools to help improve their financial future? Example: “Congratulations! You just saved $1,000 on your new dishwasher. With that savings, you may want to contribute more to your 401k or buy additional life or disability insurance. Here’s how…………”
The bottom line is that employers need to consider all the aspects of having an employee purchase program, and whether its purpose to help employees financially outweighs the potential personal financial mistakes some employees may make. I suggest we work on creating an employee benefits marketplace where all of these different types of benefit components can work together: 1) consumer choice (which automatically brings some personal responsibility) and 2) employer due diligence including the appropriate vetting of programs and the technology platforms they run on. Integrating core and these types of voluntary benefits is the best way to ensure your benefits programs delivers real value to your employees and is truly in their best interest.
The cold, hard truth of 401(k) fee disclosure
By Andy Stonehouse
Source: Benefitspro.com
For the better part of the last eight months, I've been hearing about - and writing about - the great expectations attached to the DOL-mandated 401(k) fee disclosures. They created minor mainstream headlines for an industry that, despite its huge resources and massive financial holdings for so many American workers, doesn't get a lot of mainstream media coverage.
And now the day has come, the Aug. 30 deadline for the first component of participant fee disclosures, and what should arrive in my mail box but my own actual fee disclosure overview, part of my company's 401(k) plan.
Rather than being the phone book-sized pile of impenetrable paper many hinted might be a reality - prompting the still somewhat unresolved tug-of-war with the Labor Department regarding the eco-friendly notion of all-electronic disclosure statements - it's a pretty simple document.
Painfully simple, in fact. I know the new-and-improved quarterly statements, officially due Nov. 14, might carry more heft and depth, but this new annual overview left me - after eight months of anxious anticipation - a little underwhelmed.
As you've probably found in your own recent drive toward the deadline, the necessary information shouldn't come as a big shock to any participants who have even a vague interest in the management of their retirement funds.
Which, as has been previously noted, seems to make up the larger percentage of set-it-and-forget-it or "why am I even contributing to this any more if I continue to lose money" participants, nationwide.
Nonetheless, my own personal hard, cold facts - the general plan information, the potential general administrative fees and expenses and the potential individual administrative fees and expenses are pretty concisely laid out.
Nothing's hidden - not to say that it was before - and the general details are there in a form that's much easier to wade through than the 900 page disclosures attached to my annual credit card or bank fee statements.
The biggest section of the whole eight-page disclosure is the investment information, a concise chart of the various stocks, bonds and TDFs (who knew I had so many TDFs?) and their performance.
The one-year and five-year rates of return are, as we've discussed to death, not great, but the 10-year averages are more positive.
And that's that for the paperwork. So I called my representative to ask for an interpretation, and a dollar amount. He was pleasant enough, and after a brief recap of the details, he laid it on the line: My fees, for my fund, total $1.06. About the price, with tax, of a Sausage McMuffin at McDonalds.
Really? Yes, really. Not some outlandish and exorbitant price tag that was going to send me screaming to divest and put everything in gold funds, or pharmaceuticals, or Chinese cigarette companies? Yep. A buck and change.
He also had some good news about the account, overall: "You're not doing too badly. There have been some ups and downs this year but you're actually on track to make some money."
Is it time to double down and put more in the fund, I asked?
"Sure," he said. "It's up to you."
And so the moment came and went, as will for the millions who get their statements in the mail, though the vast majority will ignore them like another mailing from their car insurance company or an online gift basket catalog.
Those who do pay attention may now have a more vested interest in consulting with an expert, and that's where you come in. So I would encourage you to take advantage of that opportunity.
10 Common Myths That Could Be Hurting Your Retirement Planning
By Erik Carter
Source: Forbes
In our latest research report, retirement was the number one financial priority of employees that took our online financial wellness assessment. It’s also a growing area of interest as the percentage of questions we’ve received about retirement planning went from 14% in 2009 to 32% the same time this year. However, I find that when I’m leading a retirement workshop or answering questions on our financial helpline, there are still quite a few recurring myths out there that could be hurting people’s ability to plan properly for their retirement. Here are 10 of the ones I hear most often:
1. It’s too early to start saving for retirement. We see this most commonly with young people. For example, those under 30 were the only age group not to list retirement as their top priority and had the lowest participation rates in their employer’s retirement plan of any age group. This is particularly unfortunate for several reasons. First, with the disappearance of traditional pension plans and the impending insolvency of government programs like Social Security and Medicare, young people will likely need to save even more than previous generations. Second, they have the most to gain from being able to invest more aggressively and benefit longer from the magic of compounding. Finally, the financial habits that young people develop early in their careers can stick with them throughout the rest of their lives.
If you’re just starting your career, try to contribute at least enough to get your employer’s match so you don’t leave that free money on the table, even if it means having to share living expenses with a roommate for a bit longer. You can then begin to slowly increase your contributions over time as their income grows. Your retirement plan may even have a contribution rate escalator that will do that for you automatically.
2. I’ll need about 80% of my current income in retirement. For many people this may be true, but retirement needs can vary dramatically based on your particular circumstances. You may need less than this if you’re saving a lot for retirement, will have your mortgage paid off, or are planning to downsize or move to a lower cost area. On the other hand, you may need more than 80% if you want to spend more time traveling or engaging in other expensive activities.
One expense that people often underestimate or neglect to factor in at all is the cost of health care. This is especially true if you’re planning to retire before you are eligible for Medicare at age 65 and would not be covered under your spouse’s plan since you would then probably need to purchase insurance on your own, which can be very expensive. Even once you reach age 65, a recent study estimated that a typical 65-yr old couple without any other health insurance would need about $240k to cover medical costs over their lifetime, not factoring in long term care or any reductions the government may make to keep Medicare solvent.
3. I won’t see a dime from Social Security. This myth comes from the fact that the Social Security trust fund has been projected to run out in 2033. The good news is that doesn’t mean there won’t be any money at all in the program. After all, millions of people will still be paying taxes into the system. However, it’s projected that there will only be enough money to pay about 75% of the promised benefits. That means you may want to take your estimated benefit and reduce it by 25%. While it seems safer to assume you’ll get nothing at all, the amount you’d have to save in that unlikely scenario can be discouraging.
4. If I contribute to a retirement plan, my money will be all tied up. This myth is often tied to the first one since young people are typically also saving for emergencies, a home purchase, and possibly going back to school. One of the best solutions for someone in this situation is a Roth IRA since the sum of the contributions can be withdrawn at any time and for any reason without tax or penalty. Whatever you don’t need to withdraw will then grow and become tax-free after age 59 1/2 (as long as the account has been open for at least 5 years).
If you already have a sizeable balance in your employer’s retirement plan, you may still be able to access this money tax and penalty free by taking a loan. Unlike credit cards and home equity loans, there is no credit check and the interest goes back into your own account. As a last resort, you may also be able to request a hardship withdrawal. Just be aware that these are limited to certain circumstances, are subject to taxes and early withdrawal penalties, and cannot be paid back. While it’s best not to touch your retirement money at all, knowing these options are available can help make you feel more comfortable about contributing to these accounts.
5. I should automatically roll my retirement plans into an IRA when I leave a company. Many financial advisors like to give this impression since most of them make money managing IRAs or selling the investments in them, but there are several reasons why it isn’t always a good idea. First, if you retire during or after the year you turn 55, you would be able to make penalty-free withdrawals from that employer’s retirement plan immediately, while you’d have to wait until age 59 1/2 with an IRA. Second, if you have company stock in your retirement plan, you may get favorable tax treatment transferring the stock to a brokerage account rather than rolling it into an IRA. Finally, you may have access to lower cost investments and advice services than with an IRA.
6. I can’t contribute to an IRA because I have a retirement plan at work. This myth comes from the fact that if you’re covered by a retirement plan at work, there are income limits in being able to deduct traditional IRA contributions. However, even if you don’t qualify for the deduction, you can still make nondeductible (but still tax-deferred) and possibly Roth IRA contributions.
7. My income is too high to put money in a Roth IRA. You may earn too much to contribute to a Roth IRA but there is a way to get money into a Roth IRA through the backdoor. Since there’s no income limit on Roth IRA conversions you can contribute to a nondeductible IRA and then convert it into a Roth. The only catch is that if you have other pre-tax IRAs, you’ll have to pay a tax on the converted IRA on a pro-rata basis. However, you can avoid this by rolling the pre-tax IRAs into your employer’s retirement account.
8. My tax rate will be the same in retirement so I don’t get any benefit from tax-deferral. While it’s true that many people will be in the same tax bracket in retirement, that doesn’t mean you won’t benefit from tax-deferral. First, you may be in the same bracket but pay a lower effective rate in retirement. For example, let’s say that you’re in the 25% bracket both now and after you retire. When you contribute to a pre-tax 401(k), you’re contributing money that would otherwise be taxed at 25%. But when you withdraw that money in retirement, some of that money is likely to get taxed at the lower brackets, providing for a lower average rate. Second, even if you pay the same rate when you retire, you’ll still benefit from all the extra earnings on the money that would have gone to taxes each year.
9. I can be well-diversified by just spreading money around all the options in my retirement plan. Depending on how that money is spread out, you may not be as diversified as you think. For example, let’s say your plan has 5 options: a company stock fund, 3 other stock funds, and a bond fund. If you spread your money equally, you’d have 20% in bonds and 80% in stocks, with 20% in company stock. That’s a pretty aggressive mix and it’s generally a good idea not to have more than 10-15% in any one stock, especially if it’s your employer’s since your job is already tied to your company’s fortunes.
You can actually be well-diversified with as little as one fund by picking a one-stop shop asset-allocation fund like a target date retirement fund. These funds divide your money into lots of different investments based on how long you have until retirement. You can also build a customized portfolio based on your particular risk tolerance and time frame using a worksheet like this.
10. I should invest my retirement account in the top-performing funds. Picking the top performing funds may seem intuitive but it turns out that not only is past performance a poor indicator of future performance, it may actually be an indicator of poor future performance. Standard and Poor’s does an ongoing study in which they look at the top 25% of mutual funds in various categories and see how they did 5 years later. Their latest report shows that these top performers are actually less likely than average to continue being a top performer.
Instead of looking at past performance, look at costs when comparing similar type funds. Numerous studies have shown a pretty good correlation between low costs and superior investment results. In fact, Morningstar even had to admit that low fees and expenses are a better indicator of performance than their own star ratings.
Baby boomers, Gen Xers view retirement through rose-colored glasses
By Margarida Correia
Source: eba.benefitnews.com
The majority of baby boomers and Gen Xers appear to be looking at their retirement years through rose-colored glasses. More than three in four feel confident they will have enough money to live comfortably in retirement, even though nearly 40% of baby boomers and about two-thirds of Gen Xers have less than $100,000 in retirement savings. Moreover, a worrisome percentage —21.7% of baby boomers and 27.8% of Gen Xers — has no retirement savings at all. The grim statistics are the highlights of a report released by the Insured Retirement Institute.
In addition to insufficient savings, significant portions of baby boomers and Gen Xers lack investment knowledge and have not taken important retirement planning steps such as calculating a retirement savings goal, the report found. Slightly more than half (51.4%) of baby boomers and less than half (40.7%) of Generation Xers have tried to calculate how much savings they will need for a comfortable retirement.
It wasn't all bad news. Baby boomers and Gen Xers who work with financial advisers, calculate their retirement savings needs and own annuities report having greater levels of retirement confidence, the study found. For example, among baby boomers who consulted a financial adviser, 42.8% reported feeling extremely or very confident about their retirement readiness compared with 32.3% who did not consult an adviser. Gen Xers also registered similar gains in retirement confidence from working with financial advisers.
The report was drawn from two surveys conducted by Woelfel Research, Inc., on behalf of IRI. One survey polled 503 Americans, ages 50 to 66, in February and March 2012. The other polled 802 Americans, ages 30 to 49, in November 10 - 22, 2011.
Summer Bump
Participants in 401(k) plans tend to take out more loans during the summer months, according to an analysis by Charles Schwab. Generally, requests for loans increase about 16 percent in those months, the report said. While the economy might seem like a likely culprit, Catherine Golladay, a vice president of participant services for Schwab, said a big reason that participants dig into their 401(k)s is the need for college funding for their children.
Cash Balance Bounce
Cash balance plans increased by 21 percent in 2010 (the latest data available), nearly doubling 2009's jump of 11 percent, according to the 2012 National Cash Balance Research Report by Kravitz. Cash balance plans are growing faster than all other retirement plans, including 401(k)s, which logged a 1 percent decline over the same period.
401(k) participants don't try to understand disclosures
By Paula Aven Gladych
Source: Benefits Pro
Although defined contribution plan participants should receive fee disclosures from their plan sponsors by Aug. 30, a new study by LIMRA shows that the vast majority of those people only spend about five minutes looking at them and most just skim them to “see if they reveal something ‘important.’”
One in five people said they rarely or never read disclosures that are sent to them.
In “Consumers’ Retirement Perspectives” for the third quarter of 2012, LIMRA found that men are more likely than women to read disclosures and younger participants are slightly more likely than older participants to read them.
The length and technical nature of disclosures are the most frequently cited reasons for not reading them, the report found. When participants want plan information, they have better luck going to their provider’s website. Younger participants are more likely to go to their employer for more information.
While 51 percent of plan participants said they have not taken action as a result of a disclosure, almost one in five reported that they changed contribution allocation or increased their contribution level. Seventeen percent said they contacted their account provider.
Participants had the highest levels of understanding of their contribution limits when it came to retirement account features. Companies took the opportunity to educate participants on investment options, fees and the taxation of withdrawals. Twenty-four percent said they did not understand these features very well or not at all.
Men were most likely to indicate they understand their account features “very well,” the report found.
The Silver Lining of 401(k) Fee Disclosures
By Jonathan Anderson
Source: benefitspro.com
In all of the recent – and perhaps herculean - efforts to develop and distribute fee disclosures, a proverbial “silver lining” actually exists.
Service providers have spent much time, effort, and expense (sometimes great) in complying with the Department of Labor’s service provider fee disclosures, effective July 1, 2012.
I also realize that service providers and employers, now focused on providing participants with the participant fee disclosures, generally effective August 30, 2012, are expending similar time, effort, and money it took for the service provider disclosures.
I further recognize the disclosures contain some additional fiduciary obligations that could be challenging (e.g. reporting to the DOL any service providers with deficient disclosures; possibly being penalized and/or sued for breaches of fiduciary duty; et cetera).
However, there is a silver lining surrounding the valuable and critical benefits resulting from the disclosures.
Service Provider Disclosures:
One of the first benefits is that plan fiduciaries now have a more compact and precise tool to help determine the actual services provided by a vendor, and the reasonableness of the fees for such, to a plan.
Since determining the reasonableness of the services and fees under a service provider arrangement has always been a requirement of the fiduciaries (to avoid a prohibited transaction), the disclosures should simplify what had been a complex process for most fiduciaries. For other fiduciaries, perhaps this will be the first time a formal determination of an arrangement’s reasonableness has actually been made.
With the new disclosure, the determination process has been made easier for the plan fiduciaries, and can allow them to make more informed decisions.
The same benefit applies with respect to documenting the process of determining of an arrangement’s reasonableness. By having a disclosure describing and summarizing the services, fees, and the parties providing the services and receiving the fees, the fiduciaries’ documentation process has been simplified. In addition, documenting the process could aid the plan sponsor/plan fiduciaries defend any legal claim that the services and fees were not reasonable.
Another benefit is that the disclosures allow fiduciaries to use more of an “apples-to-apples” comparison of one service provider’s services and fees to another service provider’s services and fees. Comparisons may be used to further justify staying with the current service provider, or to explore whether switching to a different provider might be better.
Yet another benefit is the disclosures allow fiduciaries to help identify whether any changes to the current arrangement should be explored and/or made. For instance, after reviewing the disclosures made about the investment alternatives in the required summary chart format, perhaps the plan fiduciaries may decide to add or modify the investment alternatives from which a participant may choose to invest his/her account balances.
How to Take Advantage of New 401(k) Fee Disclosures
By Emily Brandon
Source: money.usnews.com
Employees will be armed with new information about the fees they're being charged in their 401(k)s in 2012. Beginning after May 31, 2012, 401(k) participants will receive quarterly statements showing the dollar amount of fees and expenses deducted from their account and a description of what each charge is for.
[See 401(k) and IRA Changes Coming in 2012.]
The fee disclosures are required by new Department of Labor rules and could provide shocking new information to 401(k) participants. A recent AARP survey found that 71 percent of 401(k) participants think they don't pay any 401(k) fees at all. "I think some people will be surprised about how much some of the investment options charge," says Mary Ellen Signorille, an employee benefits attorney for AARP. "Some plans charge each individual basically an account maintenance fee. The changes are perfectly legal, but some people may not have known they were being charged the fee." Among survey respondents who know how much they pay in fees, the most common fee range is between 1.1 percent and 5 percent of their account balance annually.
With this new information about the 401(k) fees you are paying, you will have an opportunity to reduce the costs of your retirement investments. Here's how to take advantage of the new 401(k) fee disclosures:
Switch to lower-cost investments. Use the new fee information to help select lower-cost investments that still meet your needs for growth. The savings could allow you to accumulate a dramatically bigger retirement account balance over the course of your career. A 30-year-old employee making $50,000 per year who saves 6 percent of annual pay, gets a 50 percent 401(k) match, and earns 3 percent annual pay raises would have $115,000 more in savings at retirement if his or her 401(k) plan had fees of 0.6 percent instead of 0.9 percent, assuming an 8 percent annual return, according to Aon Hewitt calculations. Dave Loeper, CEO of Wealthcare Capital Management and author of Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money, says you should aim for expenses of 0.5 percent or less per year.
[See 4 Hidden Costs of Investing.]
Boost your returns. Extremely high fees are generally associated with lower returns. A 2010 Morningstar study found that funds with low expense ratios consistently deliver higher returns than their more-expensive counterparts. Between 2005 and 2010, the cheapest domestic equity funds produced an annualized return of 3.35 percent, versus 2.02 percent for the most expensive funds in the same category. For taxable bonds, the cheapest funds produced a 5.11 percent annualized return, compared to 3.82 percent for pricey funds. "Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance," writes Russel Kinnel, Morningstar's director of mutual fund research, in the report. "Start by focusing on funds in the cheapest or two cheapest quintiles, and you'll be on the path to success."
Get the services you are paying for. In addition to disclosing the dollar amount of the fees deducted from your account, plan sponsors must also provide information about the services provided in exchange for each charge. If you find out that you are paying for services through your 401(k) plan, make sure that you take advantage of them. "If you are paying more than half of 1 percent a year, you should be getting some additional services like personal consultations about your particular goals," says Loeper.
Ask for better options. If all the investment options in your 401(k) plan charge high fees, consider asking your employer (nicely) to add some more affordable investment choices. It might be helpful to suggest similar funds with lower expense ratios, or that the 401(k) plan offer at least one passively managed index fund. "Inquire about why lower-cost options aren't available and if there might be something that could be added," says Loeper. "If you make an inquiry about whether it is possible to add this lower-cost index fund that is similar to what we've got, that might be enough to motivate your employer to get the problem solved."
[See 7 Signs of a Good 401(k) Plan.]
Recruit help. At a time when layoffs are common, it's wise to not be the only employee criticizing the 401(k) plan. "Particularly in today's economy, you don't want to sound like a complainer," says Loeper. "If you are the only person that brings it up, your employer probably isn't going to act on it." It could be more effective to approach your employer with several other colleagues who also want to save money on their retirement investments.
New funds may be coming soon. The Department of Labor's rules were first published in 2010, and many companies have already begun looking for lower-cost investments and recordkeeping services in preparation for the required disclosures to employees. "A lot of 401(k) plans have renegotiated with their supplier and a lot of fees have come down somewhat," says Signorille.
Retire sooner. The expense ratios on your investments can affect how soon you are able to retire. A Towers Watson analysis of target-date funds, the most common default 401(k) investment, found that most target-date fund owners lose 30 percent or more of their potential retirement income to fees. That works out to be between five and 15 years' worth of retirement income that is deducted from a 401(k) account over a worker's lifetime.
[See How to Maximize the Higher 401(k) Contribution Limit.]
Switching to investments with lower expense ratios could allow you to retire years earlier. Consider an employee with a starting salary of $45,000 who contributes 8 percent of his pay to a 401(k) each year between ages 25 and 62. If he invests his retirement savings in a target-date fund charging 1 percent annually, he will lose 13.9 years' worth of retirement income to fees, Towers Watson found. If he instead chooses a target-date fund charging 0.5 percent in annual fees, he will spend 7.7 years' worth of retirement income on fees. An even more affordable target-date fund charging 0.2 percent in fees would deplete his savings by just 3.2 years' worth of retirement income.
TDF TANGLE
Employees fail to fully grasp the details of target-date funds (TDFs) in their retirement accounts, according to a recent report by the Securities and Exchange Commission. More than half (54 percent) of polled investors don't understand that different funds with the same target date may hold vastly different investments, the study found. Also, only 36 percent realized that TDFs do not provide guaranteed income in retirement.