401(k) Borrowing Isn’t Free
Have your employees been dipping into their 401(k)s to support their financial needs? Then take a look at this article by David Sherman from Employee Benefit Adviser on why employees shouldn't dip into their 401(k)s and what employers can do to help employees support themselves financially without having to use the money saved in their 401(k)s.
When dire financial need strikes, employees often tap their retirement accounts. While there are cases in which a 401(k) withdrawal makes sense, these loans should be viewed as an absolute last resort.
There are significant downsides related to 401(k) loans such as including penalties, administration and maintenance fees as well as “leakage” from retirement accounts. This occurs when an employee takes a loan on their 401(k), cashes out entirely or leaves their job and rolls over their account to their new employer.
Borrowing from retirement plans presents hazards to the employer, as well. More employers are minimizing the ability of employees to dip into their 401(k) savings by limiting the number of loans from 66% in 2012 to 45% in 2016, according to SHRM. Despite this, the bottom line is that employees need access to low cost credit.
More than 1-in-4 participants use their 401(k) savings for non-retirement needs, according to financial education provider HelloWallet. That amounts to a startling $70 billion of retirement savings that employees are siphoning away from their future.
There are hidden costs to 401(k) loans. One of the perceived benefits of a 401(k) loan is that the borrower isn’t charged any interest. That’s a fallacy: 401(k) loans typically include interest rates that are 1 to 2 points higher than the current Prime Rate plus administrative fees. While the borrower pays this money to him or herself rather than to a bank, these “repayments” don’t take into account penalty of taking money out of a 401(k) for months or years when it might have enjoyed market gains.
The downside of the interest rate is that it makes paying back the loan more difficult and this will likely lead to 401(k) leakage. In some cases, loopholes that allow employees to raid their 401(k)s before retirement reduce the aggregate wealth in those accounts by 25%. Simply put, this translates into having the most senior and highest paid employees stay on the job because they do not have enough funds in their account to retire. From an HR administrator’s standpoint, that can increase overall costs, since employees who cannot afford to retire are drawing higher-than-average salaries. And thanks to their advanced age, they also run-up costs on the employer’s medical plan.
The financial wellness alternative
Employers should offer socially responsible alternatives to borrowing from their 401k. Not only to ensure that older workers can afford to retire and make room for younger, less-expensive hires, but to ease the financial burden for employees when emergencies do happen. This should be offered as a voluntary benefit with no risk to employers. In a recent Wall Street Journal article, “The Rising Retirement Perils of 401(k) ‘Leakage’” Redner’s Markets made that leap offering a low-cost Kashable loan to its employees. It stopped leakage and offered employees of the online grocer much needed relief from financial stress.
Adding a financial wellness solution to the employee voluntary benefits package that provides access to responsible credit is a first step in untangling employees’ financials. For employees struggling with college loans and credit card debt, this financial-wellness benefit allows them to borrow when needed at a low rate. For the 35% of employees surveyed by PWC in 2016 that said they had trouble meeting their monthly household expenses and the 29% that said they had trouble meeting their minimum credit card charges each month, this voluntary program provides multiple benefits. For the employee, it is an opportunity to build or improve their credit score, and provide relief from financial stress. To the employer, it’s a risk-free solution to stop the leakage from retirement accounts.
See the original article Here.
Source:
Sherman D. (2017 June 5). 401(k) borrowing isn't free [Web blog post]. Retrieved from address https://www.employeebenefitadviser.com/opinion/401-k-borrowing-isnt-free?feed=00000152-1377-d1cc-a5fa-7fff0c920000
Rising Health Care Costs Threatening Employees’ Financial Goals
Did you know that the rising costs of healthcare could be having a negative effect on your employees' financial goals? Check out this great read by Marlene Y. Satter from Benefits Pro on how your employees' finances are being impacted by the costs of healthcare.
Employees are under financial stress — big time. In fact, 56 percent of them are stressed about their financial situation, and more than half of them say it’s taking a toll on both their ability to focus and their productivity on the job.
That’s according to the latest Bank of America Merrill Lynch Workplace Benefits Report, which finds that not only are 53 percent of stressed employees having trouble concentrating on their work, the cost of health care is a big shadow cast over workers’ financial situations. And that’s already an issue, with 43 percent of employees owning up to spending 3 or more hours a week while at the office dealing with personal financial matters.
As more employees find themselves shelling out more from their own pockets to pay health care bills — 69 percent of workers said so in 2015, but 79 percent said so in 2016 — it’s no surprise to hear that health care costs are up 10 percent since 2015. No wonder they’re stressed; salaries certainly haven’t risen to match.
Those rising health care costs are taking a bite out of most employees’ other financial goals — among workers who have experienced increasing health care costs, 56 percent are having to save less toward other objectives.
Women in particular are abandoning more discretionary spending and debt management to cover health care costs than men, with 72 percent chucking spending on recreation or entertainment, compared with 59 percent of men; 63 percent saving less for retirement, compared with 62 percent of men; and 50 percent paying down less debt, compared with 46 percent of men.
And the more expensive health care becomes, the more employees appear to appreciate employer-provided health coverage — with workers ranking health benefits as their top employer benefit (40 percent), followed by their 401(k) plan (31 percent).
Even among employees who class themselves as optimists about their financial futures, worries about health care and its cost are weighing them down. And as might be expected, money woes weigh more on women than men, even — or perhaps especially — when it comes to health care. While 52 percent of men say that becoming seriously ill and unable to work is a major concern (even larger for men than having to work longer than they planned), 58 percent of women fear illness and subsequent absence from the workplace.
And more than half of employees say that financial stress is negatively affecting their physical health. Different generations feel the effects more, with 51 percent of boomers, 56 percent of Gen Xers and 68 percent of millennials saying money worries are literally making them sick. Employers need to be aware of this and take steps to deal with it, particularly since it translates into a toll not just on workers but on the employer’s bottom line — via higher absenteeism rates and higher health care costs.
See the original article Here.
Source:
Satter M. (2017 June 1). Rising health care costs threatening employees' financial goals [Web blog post]. Retrieved from address https://www.benefitspro.com/2017/06/01/rising-health-care-costs-threatening-employees-fin
Retirement Calculator Seen as Critical Tool
Did you know that the most impactful tool for employee financial wellness is a retirement calculator? Find out more in this article by Bruce Shutan from Employee Benefit News on why you should have a retirement calculator included in your employee benefits program.
In analyzing the financial behaviors of 67,089 U.S. employee financial wellness assessments, Financial Finesse concluded that the most impactful action was for employers to offer a retirement calculator. The 2016 Year in Review Report also suggested that they promote it to the hilt with the help of their brokers and advisers.
“Running that projection is driving other behavior,” such as changes in cash flow or higher retirement plan contributions over time, explains Cynthia Meyer, a financial planner with Financial Finesse and author of the report.
She says advisers can help spotlight the use of a retirement calculator in an educational workshop or enrollment meeting where they can detail examples or case studies involving the potential effect of this handy tool.
The report uncovered a few bright spots. More employees ran a retirement projection, which jumped to 49% in 2016 from 35% in 2015. In addition, about 60% of these employees discovered they were on track to retire comfortably while about 40% discovered they were underfunded and needed to make changes.
Another positive development was that repeat usage of workplace financial wellness programs appears to be gaining momentum. The number of employees who have done annual workplace assessments of their finances multiple times has climbed steadily since 2013 when it was just 6% to 15% in 2014, 16% in 2015 and 29% in 2016.
However, problems persist. Virtually all demographic groups were still found to have insufficient savings for a comfortable retirement. For example, while 92% of the employees studied participate in an employer-sponsored retirement plan, just 77% contribute enough to earn the full employer match.
Still, Meyer notes that packaging financial wellness content with a good retirement plan is becoming a standard practice as the movement toward a more holistic view of employee finances gains traction.
Aon Hewitt’s 2017 Hot Topics in Retirement and Financial Wellbeing survey found that 59% of employers are very likely and another 33% are moderately likely to focus on the financial wellbeing of workers in ways that extend beyond retirement decisions. Moreover, 86% of employers are very or moderately likely to communicate to their workforces the link between health and wealth.
Rob Austin, director of retirement research at Aon Hewitt, says this is an indication of “just how much I think employers still care about their employees.” It certainly bodes well for brokers and advisers who can expect to be busy in the coming years helping their clients create a strategy and build out a plan that appeals to each workforce, he believes.
Aon Hewitt’s survey, whose 238 respondents represent nearly 9 million employees, noted several other key trends. They include employers enhancing both the accumulation and decumulation phases for their defined contribution plan participants, and defined benefit plan sponsors revisiting ways they’re removing risk from their plan.
See the original article Here.
Source:
Shutan Bruce (2017 May 29). Retirement calculator seen as critical tool [Web blog post]. Retrieved from address https://www.benefitnews.com/news/retirement-calculator-seen-as-critical-tool?brief=00000152-14a7-d1cc-a5fa-7cffccf00000
HSAs on the Rise, but Employees Need to Know More About Them
Are your employees aware of the many benefits and features associated with HSAs? Check out this great article by Marlene Y. Satter from Benefits Pro on why it is important employees are knowledgeable about HSAs, so they can prepare for their health care expenses while planning for retirement.
According to Fidelity Investments, health savings accounts — and the assets within them — are rising quickly, as both employers and employees try to find ways to pay for health care. Still, a number of the features of HSAs are still underutilized.
While Fidelity says that assets in its HSAs rose 50 percent in the past year, now topping $2 billion, and the number of individual account holders rose 46 percent during the same period to 657,000, it points out more work still needs to be done on showing employees the advantages of such accounts.
Since it’s estimated that couples retiring today could need $260,000 — perhaps even more — to cover their health care costs during retirement, the need for a way to save just for health care expenses, aside from other retirement expenses, is becoming more urgent.
HSAs offer a tax-advantaged way to set aside more money than a retirement account alone provides — and people who have both tend to save more overall, with 2016 statistics indicating that people who had both defined contribution and HSA accounts saved on average 10.7 percent of their annual income in the retirement account. Those with just a DC account saved on average 8.2 percent in it.
People are mostly satisfied with HSAs — 80 percent say they are, while 76 percent are satisfied with the ease of using it HSA for medical expenses, 77 percent with the quality of their health care coverage and 77 percent with how the plan helps them manage their health care costs.
But that doesn’t mean they’ve got all the ins and outs figured out yet; 39 percent mistakenly believe that they’ll lose unspent HSA contributions at the end of the year. Yet unlike contributions to health flexible spending accounts (FSA), unspent contributions to HSAs roll over from year to year.
Still, employees are learning that HSAs can provide them a means of saving that’s not restricted to cash. While it’s still not common, more people are putting HSA money into investments that can then grow toward covering longer-term health expenses, but employers, says Fidelity, can do more to educate workers on such an option. Nationally, only 15 percent of all HSA assets are invested outside of cash.
See the original article Here.
Source:
Satter M. (2017 May 26). HSAs on the rise, but employees need to know more about them [Web blog post]. Retrieved from address https://www.benefitspro.com/2017/05/26/hsas-on-the-rise-but-employees-need-to-know-more-a?ref=hp-news
Employees Look to Employers for Financial Stability
Do your employees depend on their pay and benefits for their financial security? Find out in this great article by Nick Otto from Employee Benefit News on what employees depend on from their employers to support their financial well-being.
As the American dream of financial security continues to slip out of reach for many U.S. workers, employers — seen as trusted partners by employees — will need to step up to restore faith in retirement readiness.
Only 22% of individuals described themselves as feeling financially secure, Prudential says in its new research paper, and there is growing acceptance among employers that there is significant value in improving employees’ financial wellness.
Aspirations are modest, says Clint Key, a research officer in financial security and mobility at The Pew Charitable Trusts. Between economic mobility or financial stability, an overwhelming 92% of workers say they want stability.
“Four in 10 don’t have the resources to pay for a $2,000 expense,” he said Tuesday, at a joint financial wellness roundtable sponsored by Prudential Financial and the Aspen Institute in Washington, D.C. More alarmingly, employees don’t have the income to last a month if they were to lose their job.
Still, Key adds, it isn’t so much the number of dollars in the bank, but the peace of minds that savings buy them.
And employers are feeling the repercussions of the growing stressors in the workplace.
“People who are stressed about finances are five times more likely to take time off from work to deal with personal finances,” added Diane Winland, a manager with PricewaterhouseCoopers. “Three to four hours every week go to handling personal finances, and these employees are more likely to call out sick from work.”
The security levers once in place, such as home equity, are going away and it’s becoming much more difficult for workers to handle a financial emergency, she added.
The good news, however, is employers get it, she said. “They understand employee financial wellness is tied to the bottom line and it behooves them to invest in their employees,” said Winland. “The conundrum is how to deploy and what to deploy in their programs. Is it counseling? Coaching? Is it a new snazzy app that comes out. The key is there is no silver bullet.”
So, what is there to do?
Each employer has a unique business model and employee base, and, therefore, faces different challenges when implementing a financial wellness approach, Prudential’s paper notes. “Employers should design financial wellness programs that are informed by insights into the unique financial needs of their employees, successfully educate and engage employees, and help employees take concrete actions to improve their financial health. We encourage employers to discuss financial wellness with their benefit consultants or advisers.”
And, added Robert Levy, managing director at the Center for Financial Services Innovation, just talk to your employees. “They’re open to discussing their financial challenges,” he said, and employers can engage these conversations through numerous ways: surveys, one-on-one talks, focus groups.
Prudential stepping up
To try to change the current unease in financial security, Prudential Tuesday also announced its expansion of worksite tools for employers to enable them to analyze the financial needs of their workforce and offer the employees a personalized interactive experience that includes videos, tools, webinars and articles that empower them to manage their financial challenges.
In addition, Prudential has launched a $5 million, three-year program in partnership with the Aspen Institute — a Washington, D.C.-based, non-partisan educational and policy studies organization — to promote employees’ financial security.
“The investment highlights the need to increase the national discourse about greater economic access for employees as they bear increasing risk and responsibility for their short-term and long-term financial security,” said Prudential.
See the original article Here.
Source:
Otto N. (2017 May 18). employees look to employers for financial stability [Web blog post]. Retrieved from address https://www.benefitnews.com/news/employees-look-to-employers-for-financial-stability
Millennials are Saving for 'Financial Freedom,' not Retirement
Did you know that more millennials are skipping saving money for their retirement? Take a look at this interesting article by Marlene Y. Satter from Benefits Pro on how millennials are focusing on saving for their lifestyles instead of retirement.
Well, at least millennials are saving.
According to the Spring Merrill Edge Report from Bank of America Merrill Edge, 63 percent of millennials are socking it away in the name of financial freedom: the amount of savings or income they need to live the lifestyle they want.
GenXers and boomers, on the other hand, are saving up to get out of the workplace—with 55 percent of them working toward that goal.
Younger people are apparently being driven by FOMO—or fear of missing out, with their top goals a dream job ((42 percent, compared with 23 percent of older workers) and traveling the world (37 percent, compared with 21 percent of older workers).
Millennials have also relegated marriage and parenting lower down on the priority list, with just 43 percent looking forward to wedding bells, compared with 51 percent.
Those aren’t the only things they’re focusing on. That FOMO mindset is also driving millennials to spend now on traveling (81 percent), dining out (65 percent) and exercising (55 percent). Interestingly, however, they’re still managing to save more than older generations, with 36 percent stashing more than 20 percent of their annual salary.
Of course, that doesn’t mean that everyone is doing a bang-up job of saving money; overall, 42 percent of respondents are saving less than 10 percent of their salary, and 7 percent don’t save at all.
And many lack confidence in being able to cope with “what-if” scenarios: 71 percent are not very confident they could hit financial goals in the event of a divorce (although just 5 percent are planning for the possibility), 64 percent don’t think raising a family goes hand in hand with financial success, and just 23 percent are saving for a family; and 48 percent are not very confident about achieving their goals if they outlived their significant other.
They’re apparently not all that sanguine about financial wisdom, either with 48 percent believing that financial education should be a requirement. Not a bad idea—particularly since 29 percent of respondents believe that, in the future, 401(k)s will not be the “gold standard” in retirement investing.
See the original article Here.
Source:
Satter M. (2017 May 19). Millennials are saving for " financial freedom" not retirement [Web blog post]. Retrieved from address https://www.benefitspro.com/2017/05/19/millennials-are-saving-for-financial-freedom-not-r?ref=hp-top-stories
Advisers Seek a Tech Solution to Financial Wellness
Have you been looking for a new solution to increase your client's investment into their financial well-being? Check out this great article by Cort Olsen from Employee Benefits Advisors on how advisers are using technology to help their clients invest in their financial wellness.
With many employers taking advantage of wearable wellness devices such as Fitbits and Apple Watches, advisers and consultants say they would like to see a similar platform that will efficiently monitor a person’s financial wellbeing.
“For physical wellness there are health assessments like biometric screenings to gather information and then there is the wearable data that tells people where they need to be to stay on track with their health goals,” says Craig Schmidt, senior wellness consultant for EPIC Insurance Brokers & Consultants. “The difference with the financial piece is that there isn’t a way to track users’ spending habits or monitoring their retirement funding to make their financial status more budget friendly.”
While Schmidt says he has not been able to find a platform that monitors financial status at such a personal level, John Tabb, chief product officer of Questis, has put together a platform that manages to gather data and make suggestions on what employees should be focusing their investments on such as paying off student loan debt or investing in their Roth IRA.
Tabb estimates that there are roughly 30 companies that call themselves financial wellness firms but adds that none of them are “holisitic.” “Not to say that they are not good, but there are only a handful of companies that can allow advisers at financial institutions to utilize their platform as a tool,” he says.
Saving for retirement vs. paying off student debt
Shane Bartling, retirement consultant for Willis Towers Watson, says they have developed a program with their clients that addresses gaps in the market and increases the value of the overall lineup of financial well-being services offered by employers generally around retirement readiness.
“As a result of requests from clients and the needs we have identified with our consulting work, we have built out a technology solution to compliment the line-up of other resources that clients have available,” Bartling says. “We wanted to find the indicators of poor financial wellbeing in the workforce, how to measure it and then how do we engage the parts of our workforce that are going to see the highest value from the resources we are providing.”
The WTW program offers clients an initial assessment from an adviser to determine where employees are struggling the most with their finances. “There is a way to look at behaviors employees are signaling when they are in a poor financial situation,” Bartling says. “They begin to do things like using loans, taking hardship withdrawals and then ultimately you see issues like wage garnishment tend to pop up on the radar and are opting out of the 401(k).”
SoFi has expanded its business focus from student loan refinancing firms into the workspace by helping employers offer a student loan repayment benefit.
“Looking at the employee benefits space today, student loans are generally a pretty big hole in most employers benefit offerings,” says Catesby Perrin, vice president of business development at SoFi. “The main stays of employee benefit offerings are healthcare and 401(k), which we all know are essential, but in many respects don’t address the most pressing financial concerns of the largest demographic in the workforce, which are millennials.”
Perrin adds that 401(k) and other forms retirement saving is imperative for everyone in the workforce, however retirement is not a top priority for millennials due to other financial stressors that are taking place in their day-to-day lives.
“As great as a 401(k) is and how important it is intrinsically, if you have $500 or $800 a month due in student loan payments, which is totally plausible for somebody coming out of undergrad today, the 401(k) is a total luxury,” Perrin says. “Most employers are not doing much about student loan problem, so we are offering two primary benefits today for employers… a student loan refinancing benefit and a benefit set for employers to help pay down the principle balance of their employee’s loan.”
Alternative tech gaining traction
One option is the increasing popularity of mobile push notifications. Ayana Collins, wellness consultant out of EPIC’s Atlanta office, says she is seeing a greater response from users who utilize these alerts on their smartphones to view wellness tips and strategies that they may not read if they are delivered in the form of an e-mail.
“Employees receive thousands upon thousands of e-mails and one more e-mail coming from HR or from a wellness company may not be opened,” Collins says. “If they receive a push notification from their mobile phone they are more likely to check out what financial wellness tips we are sending to them.”
Privacy invasion?
Meanwhile, new legislation determining how wellness plans are regulated has sparked a renewed interest in finding a streamlined financial wellbeing platform.
Shan Fowler, senior director of employer portfolio and product strategy at Benefitfocus, says legislation such as the Employer Participation in Repayment Act and the Preserving Employee Wellness Programs Act, will help fuel the creation of a financial wellbeing platform.
“Financial regulation is very similar to healthcare regulation,” Fowler says, “due to so many branches that are contingent with legislative support. Seeing bipartisan support for this national epidemic [has me feeling] very optimistic.”
However, employees may not be as enthusiastic. Many workers are concerned about the level of data employers could have access to, seeing it as an invasion of privacy, Fowler adds.
“I think you need to put yourself into the shoes of the employee and ask if I want my company to have access to my personal information,” he says. “That speaks to that very fine line employers have to walk of having their employees’ best interests in mind, but not going too far into a ‘big brother’ mentality.”
Tabb says that while the Questis platform does offer individual advice on financial direction based off an initial assessment, the data collected is stored in an aggregate form that protects employees’ personal information from being viewed by their superiors or colleagues.
“If the employer wants some data, they are going to pay for it to help them make decisions, but it is all on an aggregate level,” Tabb says. “There is certainly a perception that needs to be addressed to ensure employees that their data is safe and that nothing is being shared with their employer that does not need to be shared.”
Both Bartling and Perrin also say their platforms offer data to employers only in an aggregate form to give them an idea of how many employees are utilizing the benefit and also the projected success rates, but when it comes to the personal finances of each individual employee, security is in place to ensure private financial information is protected.
EPIC’s Collins says no matter what branch of wellness an employer invests in, whether it be financial, physical or mental, there needs to be a reason behind the technology that they are using. If there is no payout for the employee, there will be no demand to carry the program.
“There has to be a ‘so what’ behind it,” Collins says. “If the employer is just doing a simple challenge with nothing behind it, people are not going to gravitate toward it, because it doesn’t create a moment where the users discover an improvement to themselves. That is the whole point behind wellness.”
See the original article Here.
Source:
Olsen C. (2017 May 11). Advisers seek a tech solution to financial wellness [Web blog post]. Retrieved from address https://www.employeebenefitadviser.com/news/advisers-seek-a-tech-solution-to-financial-wellness
6 Actions Employers Can Take to Boost Retirement Savings
Preparing your employees for their retirement has become a major responsibility for employers. From education to offering the right program for your employees to start saving, employers now more than ever must be prepared for everything involved with retirement. Take a look at this great article from Benefits Pro on what you can do to prepare yourself and your employees for retirement by Marlene Y. Satter.
Lots of people point to self-indulgent millennials or debt-beleaguered GenXers or negligent boomers as the reason for the retirement crisis and the cause of their own hardships.
But a Morningstar study instead points the finger at employers, and their disinterest in working harder to improve retirement plans so that they elicit the best response from employees.
A blog post from the Center for Retirement Research at Boston College highlights the study and points out that employers could improve retirement outcomes for their workers—if they were sufficiently interested in doing so—based on research already in hand.
Employers who offer 401(k)s to their workers made some progress, mostly, along the path of automatic enrollment, the blog post notes, during the early 2000s, with notable success: “Today,” it says, “nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.”
But progress along those lines has ground to a halt, it points out, and because of the huge variations among 401(k) plans there are plenty of cracks in the private system through which employees are all too ready to fall—and employers apparently too ready to let them.
The Morningstar report points out that even when companies do use auto-enrollment, plans aren’t designed well enough to encourage an adequate level of savings—or, in fact, actually discourage it.
The report, titled “Save More Today: Improving Retirement Savings Rates with Carrots, Sticks, and Nudges,” highlights a number of ways in which plan features actually work against employees saving enough to actually retire on—but the flip side of that is that those features can be tweaked so that they work for the employee’s benefit, and turned into those carrots, sticks and nudges.
And it doesn’t even have to be expensive, since many employers are concerned about the outlay for a retirement plan and are often reluctant, at best, to add to it.
Here are 6 ways employers can encourage their employees to save more for retirement—and at limited, or no, additional cost.
6. Auto-enrollment.
If a company’s plan doesn’t have automatic enrollment, it should, since the results are so outstanding.
Lots of people fail to sign up, if “voluntary” enrollment is required, due to procrastination, preoccupation or other human failings—but if it’s an automatic feature, they get swept up and are saving for retirement almost before they know it.
Says the report: “[P]articipation rates are significantly higher in plans with automatic enrollment (compared to voluntary enrollment schemes).” It adds, “[E]arly research by Madrian and Shea (2001) noted a 48-percentage-point increase in 401(k) participation among new employees after the adoption of automatic enrollment.”
That’s a small action to have such a large effect.
5. Automatic reenrollment.
The marked effect of auto-enrollment on participation has a corollary: existing eligible employees aren’t usually included when the feature is added to a plan.
And this is not unusual.
In fact, the study cites two others that find the inclusion of “reenrollment”—adding existing employees to a plan—is “relatively uncommon,” with the studies finding only 15 percent or 12 percent of plans offering that opportunity.
However, adding “reenrollment” when an auto-enrollment feature is added can significantly boost the participation of existing employees.
4. Higher default savings rate.
An aggressive default savings rate will get employees saving more from the very beginning—and although employers say that workers will be reluctant to accept a rate of anywhere from 6–8–10 percent rather than the more common 3 percent, that’s contrary to study findings.
In fact, says the study, “Roughly half of investors tend to accept the initial default savings rate regardless of level, up to 6 percent using empirical data and up to 12 percent based on the online survey.”
And that’s not all: it adds that “Participants who reject the default rate tend to select higher savings rates, on average, as default rates rise,” which means they are saving even more.
This can be particularly important since, the report says, many employers are more concerned with the participation rate than the savings rate—but the savings rate is what will save employees come retirement.
3. Mandatory auto-escalation.
Automatic escalation, the study reports, “is commonly offered in conjunction with automatic enrollment (e.g., 62 percent of plans offering automatic enrollment also offered automatic escalation according to Aon.”
But only a third to a half of plans actually offer it, despite its benefits—and 62 percent of those who do provide it on an opt-in, rather than an opt-out, basis.
That design is poor on two counts: not only does it not “sweep” everyone into an automatic increase in savings, people who have to opt in don’t always keep doing so.
Just 11 percent, the report says, stay in the plan when it is opt-in, compared with 68 percent who do so when it is opt-out.”
And then there’s the issue of whether the auto-escalation rate is set high enough. Since workers will often accept whatever the default is, setting the rate higher rather than lower would push them to save more and better prepare them for retirement.
2. Matching contributions.
Matching contributions are a thorny issue, since driving up the participation rate will require more in contributions.
As a result, employers might not only be reluctant to boost the participation rate too much, they’re not all that anxious to increase their matching contributions either.
But again, a tweak can change employee behavior without a large increase in cost.
One option is to stretch the match out further; for instance, matching 25 percent of the first 8 percent of employee deferrals instead of matching 50 percent of the first 4 percent employee deferrals. Another option is moving to a discretionary match approach.
1. In-plan advice.
Plans that provide employees with advice can also have a marked effect on savings behavior, with higher recommended savings levels from in-plan financial advisors.
In fact, 90 percent of participants who engaged an in-plan advice solution increasing their savings rates—by about 2 percentage points on average.
“Additionally,” the report says, “higher savings recommendations result in higher implemented savings levels (i.e., more is better).”
This is one area in which it’s not clear whether opting in or having to opt out is more effective.
Perhaps it’s that those who are willing to save more seek out guidance on how much to save.
See the original article Here.
Source:
Satter M. (2017 May 15). 6 actions employers can take to boost retirement savings [Web blog post]. Retrieved from address https://www.benefitspro.com/2017/05/15/6-actions-employers-can-take-to-boost-retirement-s?ref=hp-top-stories&page_all=1
Traditional IRA, Roth IRA, 401(k), 403(b): What’s the Difference?
The earlier you begin planning for retirement, the better off you will be. However, the problem is that most people don’t know how to get started or which product is the best vehicle to get you there.
A good retirement plan usually involves more than one type of savings account for your retirement funds. This may include both an IRA and a 401(k) allowing you to maximize your planning efforts.
If you haven’t begun saving for retirement yet, don’t be discouraged. Whether you begin through an employer sponsored plan like a 401(k) or 403(b) or you begin a Traditional or Roth IRA that will allow you to grow earnings from investments through tax deferral, it is never too late or too early to begin planning.
This article discusses the four main retirement savings accounts, the differences between them and how Saxon can help you grow your nest egg.
“A major trend we see is that if people don't have an advisor to meet with, they tend to invest too conservatively because they are afraid of making a mistake,” said Kevin. “Then the problem is that they don't revisit it and if you’re not taking on enough risk you’re not giving yourself enough opportunity for growth. Then you run the risk that your nest egg might not grow to what it should be.”
“Saxon is here to help people make the best decision on how to invest based upon their risk tolerance. We have questionnaires to determine an individual’s risk factors, whether it be conservative, moderate or aggressive and we make sure to revisit these things on an ongoing basis.”
Traditional IRA vs. Roth IRA
Who offers the plans?
Both Traditional and Roth IRAs are offered through credit unions, banks, brokerage and mutual fund companies. These plans offer endless options to invest, including individual stocks, mutual funds, etc.
Eligibility
Anyone with earned, W-2 income from an employer can contribute to Traditional or Roth IRAs as long as you do not exceed the maximum contribution limits.
With Traditional and Roth IRAs, you can contribute while you have earned, W-2 income from an employer. However, any retirement or pension income doesn't count.
“Saxon is here to help people make the best decision on how to invest based upon their risk tolerance. We have questionnaires to determine an individual’s risk factors, whether it be conservative, moderate or aggressive and we make sure to revisit these things on an ongoing basis.”
Tax Treatment
With a Traditional IRA, typically contributions are fully tax-deductible and grow tax deferred so when you take the money out at retirement it is taxable. With a Roth IRA, the money is not tax deductible but grows tax deferred so when the money is taken out at retirement it will be tax free.
"The trouble is that nobody knows where tax brackets are going to be down the road in retirement. Nobody can predict with any kind of certainty because they change,” explained Kevin. “That’s why I'm a big fan of a Roth.”
“A Roth IRA can be a win-win situation from a tax standpoint. Whether the tax brackets are high or low when you retire, who cares? Because your money is going to be tax free when you withdraw it. Another advantage is that at 70 ½ you are not required to start taking money out. So, we've seen Roth IRA's used as an estate planning tool, as you can pass it down to your children as a part of your estate plan and they'll be able to take that money out tax free. It's an immense gift,” Kevin finished.
Maximum Contribution Limits
Contribution limits between the Traditional and Roth IRAs are the same; the maximum contribution is $5,500, or $6,500 for participants 50 and older.
However, if your earned income is less than $5,500 in a year, say $4,000, that is all you would be eligible to contribute.
"People always tell me 'Wow, $5,000, I wish I could do that. I can only do $2,000.' Great, do $2,000,” explained Kevin. “I always tell people to do what they can and then keep revisiting it and contributing more when you can. If you increase a little each year, you will be contributing $5,000 eventually and not even notice."
Withdrawal Rules
With a Traditional IRA, withdrawals can begin at age 59 ½ without a 10% early withdrawal penalty but still with Federal and State taxes. The Federal and State government will mandate that you begin withdrawing at age 70 ½.
Even though most withdrawals are scheduled for after the age of 59 ½, a Roth IRA has no required minimum distribution age and will allow you to withdraw earned contributions at any time. So, if you have contributed $15,000 to a Roth IRA but the actual value of it is $20,000 due to interest growth, then the contributed $15,000 could be withdrawn with no penalty.
Employer Related Plans - 401(k) & 403(b)
A 401(k) and a 403(b) are theoretically the same thing; they share a lot of similar characteristics with a Traditional IRA as well.
Typically, with these plans, employers match employee contributions .50 on the dollar up to 6%. The key to this is to make sure you are contributing anything you can to receive a full employer match.
Who offers the plans?
The key difference with these two plans lies in if the employer is a for-profit or non-profit entity. These plans will have set options of where to invest, often a collection of investment options selected by the employer.
Eligibility
401(k)'s and 403(b)'s are open to all employees of the company for as long as they are employed there. If an employee leaves the company they are no longer eligible for these plans since 401(k) or 403(b) contributions can only be made through pay roll deductions. However, you can roll it over into an IRA and then continue to contribute on your own.
Only if you take possession of these funds would you pay taxes on them. If you have a check sent to you and deposit it into your checking account – you don't want to do that. Then they take out federal and state taxes and tack on a 10% early withdrawal penalty if you are not age 59 ½. It may be beneficial to roll a 401(k) or 403(b) left behind at a previous employer over to an IRA so it is in your control.
Tax Treatment
Similar to a Traditional IRA, contributions are made into your account on a pretax basis through payroll deduction.
Maximum Contribution Limits
The maximum contribution is $18,000, or $24,000 for participants 50 and older.
Depending on the employer, some 401(k) and 403(b) plans provide loan privileges, providing the employee the ability to borrow money from the employer without being penalized.
Withdrawal Rules
In most instances, comparable to a Traditional IRA, withdrawals can begin at age 59 ½ without a 10% early withdrawal penalty. Federal and State government will mandate that you begin withdrawing at age 70 ½. Contributions and earnings from these accounts will be taxable as ordinary income. There are certain circumstances when one can have penalty free withdrawals at age 55, check with your financial or tax advisor.
In Conclusion…
"It is important to make sure you are contributing to any employer sponsored plan available to you so that you are receiving the full employer match. If you have extra money in your budget and are looking to save additional money towards retirement, that’s where I would look at beginning a Roth IRA. Then you can say that you are deriving the benefits of both plans - contributing some money on a pretax basis, lowering federal and state taxes right now, getting the full employer contribution match and then saving some money additionally in a Roth that can provide tax free funds/distributions down the road," finished Kevin.
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10 Misconceptions About Saving for Medical Care in Retirement
Are you properly prepared for your medical costs during retirement? Take a look at this great article by Marlene Y. Satter from Employee Benefits Advisors to find out what are the top misconceptions people have about medical costs when planning for their retirement.
Retirement isn’t the only thing workers have trouble saving for; the other big gap in planning is health care.
According to a Voya Financial survey, Americans just aren’t ready to pay for the health care they might need in retirement. Their estimates of what they might need are low—when they estimate them at all, that is—and their savings are even lower.
With worries over money woes keeping people up at night—so says a CreditCards.com poll—the only worry that surpassed “having enough saved for retirement” was “health care and insurance.”
And consider, if you will, all the turmoil in the health insurance market these days, what with potential changes to—or an outright repeal of—the Affordable Care Act waiting in the wings, not to mention the skyrocketing costs of both care and coverage.
In light of all this uncertainty, it’s no wonder that the little matter of paying for health care is keeping people awake.
But, considering all that, it’s even more surprising that there are so many common misconceptions about health care, its cost and how to pay for it at large in the general population.
American workers are not just ill prepared for retirement, they’re even more ill prepared for any illness or infirmity that may come along with it.
According to research from the Employee Benefit Research Institute (EBRI), a 65-year-old man would need $127,000 in savings while a 65-year-old woman would need $143,000—thanks to a longer projected lifespan—to give each of them a 90 percent chance of having enough savings to cover health care expenses in retirement.
But that doesn’t appear to have filtered its way down to U.S. workers, who are blissfully (well, maybe not so blissfully) ignorant of the mountain of bills that probably lies ahead.
While demographics play a role, there are smaller differences among some groups than one might otherwise expect. In addition, it’s also rather surprising where Americans plan to get the money to pay for whatever care they receive, and how far they think that money will stretch when it also has to pay for food, clothing, shelter and any activities or other necessities that come along with retirement.
Read on to see 10 misconceptions workers have about how and how much they think they’ll pay for medical care in retirement. As you’ll see, some generations are more prone to certain errors than others.
10. Workers just aren’t estimating how much health care will cost them in retirement.
Perhaps they’d rather not know—but according to the poll, 81 percent of Americans have not estimated the total amount health care will cost them in retirement; among them are 77 percent of boomers. Retirees haven’t estimated those costs, either; in fact, just 21 percent of them have. But that’s actually not that bad, when considering that among Americans overall, only 14 percent have actually done—or tried to do—the math.
And among those who have tried to calculate the cost, 66 percent put them at $100,000 or less while an astonishing 31 percent estimated just $25,000 or less.
9. People with just a high school education or less, and whites, are slightly more likely than those who went to college, and blacks, to have attempted to figure it out.
The great majority among all those demographic groups just aren’t looking at the numbers, with 88 percent of black respondents and 79 percent of white respondents saying they have not estimated how much money it will take to pay their medical costs throughout retirement.
And while 80 percent of those with a high school diploma or less say they haven’t run the numbers, those who spent more time in school have spent even less time doing the calculations—with 81 percent of those with some college and 82 percent of those who graduated college saying they have not estimated medical costs.
8. Millennials are the most likely to underestimate health care costs in retirement.
A whopping 74 percent of millennials are among those lowballing what they expect to spend on health care once they retire, figuring they won’t need more than $100,000—and possibly less.
Not that they really know; 85 percent haven’t actually tried to calculate their total health care expenses for retirement. But they must be believers in the amazing stretching dollar, with 42 percent planning to use general retirement savings as the primary means of paying for health expenses in retirement, excluding Medicare.
GenXers, by the way, were the most likely to guess correctly that the bill will probably be higher than $100,000—but even there, only 28 percent said so.
7. They have surprisingly unrealistic expectations about where they’ll get the money to pay for medical care.
Excluding Medicare, 34 percent intend to use their general retirement savings, such as 401(k)s, 403(b)s, pensions and IRAs, as the primary means of paying for care, while 25 percent are banking on their Social Security income, 7 percent would use health savings accounts (HSAs) and 6 percent would use emergency savings.
That last is particularly interesting, since so few people have successfully managed to set aside a sizeable emergency fund in the first place.
6. Despite their potential, HSAs just aren’t feasible for many because of their income.
HSAs do offer ways to set aside more money not just for medical bills in retirement but also to boost retirement savings overall, and come with fairly generous contribution limits. But people with lower incomes often can’t even hit the maximum for retirement accounts—so relying on an HSA might not be realistic for all but those with the highest incomes.
Yet people with lower incomes were more likely than those who made more to say HSAs would be the main way they’d pay for medical expenses. Among those who said they’d be relying on HSAs to pay for care in retirement, 5 percent of those with incomes less than $35,000 and 14 percent of those with incomes between $35,000–$50,000 said that would be the way they’d go.
Just 9 percent of those with incomes between $50,000–$75,000, 7 percent of those with incomes between $75,000–$100,000 and 9 percent of those with incomes above $100,000 chose them.
5. A few are planning on using an inheritance to pay for medical bills in retirement.
It’s probably not realistic, and there aren’t all that many, but some respondents are actually planning on an inheritance being the chief way they’ll pay for their medical expenses during retirement.
Millennials and GenXers were the most likely to say that, at 2 percent each—but they may not have considered that the money originally intended for an inheritance might end up going to pay for other things, such as caregiving or child care, and indeed much of their own retirement money could end up paying for care for elderly parents. A lot more people end up acting as caregivers—especially among the sandwich generation—and may find that relying on inheriting money from the people they’re caring for was not a realistic expectation.
4. Women don’t know, guess low.
Just 13 percent of women have gone to the trouble of estimating how much health care will cost them during retirement, but that didn’t stop 32 percent from putting that figure at $25,000 or less.
And that’s really bad news. It’s particularly important for women to be aware of the cost of health care, since not only do they not save enough for retirement to begin with—42 percent only contribute between 1–5 percent, the lowest level, compared with 34 percent of men, often thanks to lower salaries and absences from the workplace to raise children or act as caregivers—but their longer lifespans mean they’ll have more years in which to need health care and fewer options to obtain it other than by paying for it.
Men are frequently cared for by (predominantly female) caregivers at home, while women tend to outlive any family members who might be willing or able to do the same for them.
3. Men don’t know, but guess higher.
While the same percentage of women and men have not estimated their retirement health care expenses (81 percent), men were more likely than women (24 percent, compared with 15 percent) to come up with an estimate higher than $100,000.
2. The highest-income households are most likely to have tried to estimate medical cost needs during retirement.
Probably not surprisingly, households with an income of $100,000 or more were the most likely to have tried to pin a dollar figure to health care needs, with 21 percent saying they’d done so.
Households with incomes between $50,000–$75,000 were least likely to have done so, with just 11 percent of them trying to anticipate how much they’ll need.
And just because they have more money doesn’t mean their estimates were a whole lot more accurate—only 38 percent of those $100,000+ households thought they’d need more than $100,000 to see them through any needed medical care during retirement, while 59 percent—the great majority—figured they could get by on $100,000 or even less.
1. Where they live doesn’t seriously affect their estimates, although it will seriously affect their cost of care.
Among those who have tried to anticipate how much they’ll need in retirement for medical care, there’s not a huge difference among how many guessed too low—even though where they live can have a huge effect on how much they’ll end up paying, particularly for long-term care.
While the most expensive regions for LTC tend to be the northeast and the west coast, and the cheapest are the south and midwest, there’s not a great deal of variance among those who estimate they can get by on care for $100,000 or less—even if people live in one of the most expensive regions. Sixty-seven percent of those in the northeast said care wouldn’t cost more than that, while 63 percent of those in the midwest, 71 percent of those in the south and 61 percent of those in the west said the same thing.
When it came to those who said they’d need more than $100,000, 24 percent of those in the west thought they’d need that much; so did 20 percent of those in the midwest, just 18 percent of those in the northeast and 17 percent of those in the south.
See the original article Here.
Source:
Satter M. (2017 April 24). 10 misconceptions about saving for medical care in retirement [Web blog post]. Retrieved from address https://www.benefitspro.com/2017/04/24/10-misconceptions-about-saving-for-medical-care-in?ref=hp-news&page_all=1
