The dramatic increase in average life expectancy during the 20th century might be society’s greatest achievement.

Most babies born in 1900 did not live past 50, yet life expectancy from birth in the US now exceeds 78 years! (83 in Japan)

But that is from birth.  If you happen to have made it to age 65 – and you happen to be married – your joint life expectancy is somewhere around age 94.

But these “bonus years” that science has gifted us will not live up to their potential unless we are prepared with sufficient retirement income.  And these days – for better or worse – the “go to” method of retirement investing for many Americans is the employer sponsored 401k or 403b plan.  So be sure to avoid the following 3 ways that people mess up their 401k or 403b:

1) Borrowing Against It:  According to a recent Fidelity study, 18% of  plan participants have outstanding loans.  While it’s good that the interest you pay back goes to your account, you are still missing out on gains by the amount borrowed.

2) Poor Investment Selection:  The wrong allocation (i.e too much or too little risk) can affect your ability to accumulate and distribute sufficient retirement income.  If your plan provides for on-line or one on one investment advice take advantage of it so you can get your allocation right.

3) Not Deferring Enough:  Everyone should invest at least enough to get the match.  And most advisers and studies today recommend participants defer at least 10% of income for an adequate retirement nest egg.

In early non-industrial societies, the risk of death was high at every age.  And only a small portion of people reached old age.  But now the number of centenarians (100 year olds) is projected to increase 10-fold between 2010 and 2015.

So if  you defer enough into your 401k or 403b.  And make proper investment selections without borrowing, you will be better prepared for your longer retirement!

  

 

 

 

 

 

 

 

 

As more information and ideas become available, the world becomes more complex because for every useful or relevant idea we come across we are faced with a corresponding amount of “noise” (not useful or irrelevant information). 

Nowhere is this more true than in the world of investing.  I continually come across highly intelligent people in various professions that appear totally lost when discussing their 401k or IRA or 403b, which makes the groundbreaking study “Determinants of Portfolio Performance” more important today than it has ever been.

Data was used from 91 pension plans for a 10 year period beginning in 1974 and the key finding was that “investment policy explained on average fully 93.6 per cent of the total variation in actual plan return”

To simplify this for 401k plan sponsors and participants – it means that your asset allocation decision (% allocated to stocks vs bonds vs cash) will account for the overwhelming majority of your result.  More Stocks = higher return with more volatility.  More Bonds and Cash = lower return with less volatility.

So at your next 401k or 403b enrollment meeting you can tune out the “noise” (ramblings about fund performance, tactical strategies, alpha and betas) – and stay focused on what’s important:  selecting an appropriate allocation and making sure you defer enough.

 

 

Maximizing 401k or 403b Contributions in 2015

 

 

 

 

 

 

If you entered the workforce in 1985 you would have been pleased to learn that 89% of the 100 largest companies offered their employees a defined benefit plan. (Guaranteed Pension In Retirement)

Fast forward to 2002….. only 50%!

Fast forward to 2010…. only 16%!!

 

 

 

 

 

 

 

With longer retirements and lower expected returns the shift from Defined Benefit (Guaranteed Pension) to Defined Contribution (401k OR 403b) should continue, making it more important than ever to maximize your 401k or 403b contributions.  Contribution limits have increased for 401k plans in 2015 but IRAs are unchanged.

Highlights include the following:

The elective deferral (contribution) limit for employees who participate in 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000.

The catch-up contribution limit for employees aged 50 and older who participate in 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000.

The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

 

 

How to keep 401k or 403b fees reasonable

 

 

 

 

 

A married couple in the USA age 65 in decent health faces about a 50% chance that one of them will live until age 95.  Which means they need to plan for at least 30 years of inflation adjusted retirement income.  And with Corporate pensions and government entitlements on the decline, the 401k and 403b plan – for better or worse – will play an increasingly important role in generating this income for many Americans.

And there is so much noise and confusion out there about how to set up these plans and which investments to use but it’s really very simple (at least the investment part of it): Defer enough salary (recommended amount is at least 10%), maintain an appropriate asset allocation with sufficient equities and keep fees reasonable.

So regarding that last point – if you are a sponsor of a 401k or 403b plan, here are 3 steps you can take:

Confirm receipt of your 408(b)(2) disclosure for each covered service provider (“CSP”):  The DOL’s section 408(b)(2) rule requires service providers to provide specific information to assess the reasonableness of fees and identify conflicts of interest.

Examine this notice for accuracy:  Theses notices are often inaccurate and/or incomplete.

Make sure your fees are reasonable: This is done by either “bench-marking” your plan against competitors or  simply shopping your plan to a few other carriers and keeping the proposals in your files.

Keeping your 401k or 403b plan fees reasonable – along with consistent and robust participant education and advice – will help your participants face 30 or more years of retirement with greater dignity.

 

 

3 Ways To Tell If You Have A Good 401K Plan

 

 

 

 

 

 

401k and 403b plans have gotten a bad rap in the press – especially lately.  As the 401k replaces the defined benefit plan as the primary retirement savings vehicle for many, we are learning that many of these plans have high fees and under-performing funds.  And because the 401k or 403b has no guarantees, this is of concern.  But like anything else – some plans are better than others; so here are 3 ways to tell if you have a good 401k plan or not:

1) It has a match: A match is free money for participants – so obviously that is one sign of a good 401k plan and will improve retirement outcomes.  The most common match formula is: 50% of contributions up to 6% of salary.  Does your plan have a match?

2) It has a broad choice of low cost funds: Less expenses means more money at retirement for the participant, hence better outcomes.  A good way to tell if your plan has a broad choice of low cost funds is to find out if index mutual funds and exchange traded funds are in the line-up.  Does your plan offer index funds and exchange traded funds?

3) It has good service providers: The expenses in the plan that cover administration and investments should be buying you good service – from recordkeepers (on administrative and plan design matters) and from financial advisers (for participant education and advice).  Do you notice recordkeepers and financial advisers visiting the company on a regular basis to provide service? 

As the amount of years spent in retirement increases – along with healthcare and custodial care costs – retirement planning is an increasingly important task.

And making sure that you have a good 401k or 403b is a nice place to start.

 

 

Getting Your 401k Allocation Right

 

 

 

 

 

As an advisor to individual investors and 401k plan participants, I am often perplexed by the way participants approach their investment selection in their 401k or 403b plan.  Some participants will simply mirror what their HR director does, while certain studies have shown that employees tend to just “equally divide” contributions among choices.  So if there are 4 fund choices, 25% will end up in each and if there are 5 choices, 20% in each and so on.  The names that are given to 401k investment choices don’t help much and in fact tend to confuse matters:

Capital Builder?  World Growth?  Dynamic Flex 1vx?  Constellation?  Magellan?

What do those names mean?

A 401k participant needs to get through the noise and to the signal – (what’s most important) and in the context of  401k investment selection, it’s the overall asset allocation that matters most.  That is –  the % mix of Equities (Stocks), fixed income (Bonds) and cash.

A clean and strategic way to do that is by selecting a “manged” or “target date” fund which should reveal clearly what the asset allocation mix is.  If a participant wants to mix and match investment choices such as Mutual Funds or ETFs  to create their own portfolios – that’s fine - as long as they are aware of what the overall asset allocation is.  (An allocation of 74% stocks will perform dramatically different than 38% stocks but it might be hard to know where you are by simply selecting funds with generic fund named after stars and cruise ships that were designed for marketing purposes, not transparency)

You can figure out – and continually monitor – your overall 401k allocation with assistance from your 401k financial advisor and/or the use of a software program from Morningstar or something similar.

 

3 Strategies To Boost 401k Plan Participation

  

 

 

 

 

 

About 1/3 of eligible participants do not participate in their employer’s 401k plan. (Source: department of labor).  As defined contribution plans continue to replace defined benefit pensions, increased participation benefits both employer and participant – so here are three strategies to help boost 401k participation:

1) Auto Enrollment:  In the great book “Save more tomorrow” the author points out that of all the methods that can boost participation – nothing compares with auto – enrollment.  The author draws a comparison between organ donations and 401k participation by pointing out  that countries who automatically have their citizens become organ donors and require  them to “opt out”  have significantly greater participation due to “inertia” ..and the same holds true with participation in 401k plans.

2) Consistent face to face investment education and advice:  Employees need a financial advisor to meet with participants regularly, not just at the initial enrollment meeting.  Plans that have an advisor who visits in person on a regular basis blow away the participation rate of those that do webinars – or even worse have no financial advisor at all.

3) Adequate and cost effective investment lineup:  A broad array of mutual funds and ETFs will encourage better participation.  But not too many choices; somewhere around 9-12 stand alone choices along with a menu of target date (Managed) funds is ideal.  Also – keeping the fees down with index funds and ETFs (and letting clients know the fees are reasonable) will help because a lot of bad press about excessive 401k fees may keep people away from the plan.

Increased 401k participation is a WIN – WIN - WIN for employer, employee and advisors – so consider the impact that auto enroll, face to face advice and a great investment lineup might have.

 

 

 

 

 

 

 

In the end, successful investing is less about being brilliant or shrewd and more about avoiding big (Dumb) mistakes.  Here are 3 of them made by 401k and 403b participants you should try to avoid:

1) Not deferring enough salary :  The most important aspect of your retirement planning is investing an appropriate amount during accumulation phase and withdrawing an appropriate amount at distribution time.  So a big (Dumb) mistake would be not deferring (investing) enough.  401k experts recommend that you defer 12.3% of your salary (Source:  save more tomorrow, page 98, Shlomo Benarzti)

2) Trying to time the market:  Certain systems are too complex to predict what will happen in the near future.  What makes market timing so hard is that you need to be right twice:  at the top and again at the bottom.  You’re better off setting a strategic asset allocation based on your goals and objectives and re-balancing occasionally.

3) Under diversification:  Some investors mistake “familiar” with “safe”.  Because they are familiar with the brand of their employer they assume the stock is safe and end up with too much company stock in their 401k or 404b plan.  But anything can happen to one company (Think Enron, Lehman, Pan Am) so it important to properly diversify.  If more than 10% of your account is in any one company you are under diversified.

To be a successful participant investor in a 401k/403b plan you don’t need to be Warren Buffett or George Soros.  Just avoid the Big Mistakes.. starting with not deferring enough, trying to time the market and being under diversified.

4 trends in 401k and 403b plans…

 

 

 

 

 

 

If you are 65 years old, in good health and married, there is close to a 50% chance that you or your spouse will make it to 95 (source financeware.com)

Further, there will be less and less reliance on Corporate benefits and government entitlements for retirement income security.

All of this is resulting in a shift (back) to fiscal self-reliance in retirement and – for better or worse – the 401k and 403b plan will continue to play a big role in this phenomena.

With that in mind, if you are an employer (sponsor) of a 401k or 403b plan here are 4 trends you want to know about:

1) Expense management: The new fee disclosure rules are finally having an effect – fees are coming down to earth where they should be.  According to a recent survey by NEPC, LLC  “Fees related to retirement investment accounts hit a record low this year.  In particular, recordkeeping costs, the second largest component of total fees, saw the sharpest decline”.  You can now get a  very good 401k plan for an “all in” fee of 1% or less.  1.5% may be reasonable depending on the plan size and services being rendered.  2% is now excessive.  Make sure to peel back all the layers of the plan – administration, recordkeeping, investments, etc. to shed light on the true cost – as the companies tend to make that difficult to see.

2) Roth Features The roth option was intended to expire on December 31st 2010 – but the Pension protection act extended the Roth Option indefinitely.  Adding this feature is  a no-brainer.  The Roth feature allows participants to contribute after tax dollars then enjoy tax free withdrawals at retirement.  While many will pass on it looking for the current deduction – some folks will go for it – so it’s definitely an option participants should now have.

3) “Auto arrangements” The jury is out and the verdict is in.  Auto features work!  The only thing harder than making a decision is changing one – and there lies the magic in auto features.  The great book on 401k plans Save More Tomorrow informs us that nothing comes even close to auto enrollment (and its sister feature auto escalation) in  improving retirement outcomes.

4) Fiduciary services: (This is not intended to be legal advice, just an overview) As you evaluate a new 401k plan (or re-evaluate your existing plan) understand that there are differing levels of fiduciary Protections to consider from partial to total responsibility including:

  • ERISA Section 3(21):  These advisers assume “co – fiduciary” responsibility.  They can offer objective advice to the plan sponsor who then makes the final decision on investments options
  • ERISA section 3(38):  This flavor of advisor assumes “total” responsibility – and liability – for selection monitoring and removal of investment options
  • ERISA 3(16):  These folks assume total responsibility for the administration and operation of the entire plan, including hiring and firing service providers, timely filings, disclosure notices and more.
 
As we take control of our retirement security by creating a sufficient income that cannot be outlived – we need to keep up with trends in 401k and 403b plans – and expense managements, Roth features, auto arrangements and fiduciary services are some of the newer and very important ones.

 

 

 

 

 

 

 

 

Since January 1 2006, employers offering 401k retirement plans to their employees have been able to amend their plans to accept contributions on an after-tax basis, similar to Roth Individual Retirement Accounts (Roth IRAs).

Designated Roth contributions grow with tax-free earnings and are distributed at retirement without triggering any future income tax liability.  Although the Roth 401k option was intended to expire on December 31, 2010, the Pension Protection Act of 2006 extended the program indefinitely. Here are some things to consider:

BENEFITS FOR EMPLOYEE-PARTICIPANTS

The Roth 401k combines elements of both a Roth IRA and a traditional 401k plan.  The Roth 401k:

  • Does not limit participation by income, unlike the Roth IRA
  • Allows participants to contribute on an after-tax basis, like the Roth IRA, up to the amounts permitted under a traditional 401k.

Therefore, higher income employees who are ineligible to open a Roth IRA can instead contribute to a Roth 401k at higher amounts than are permitted in a Roth IRA.   By contributing to a Roth 401k plan, employees can contribute on an after-tax basis without being taxed in the future.

ROTH 401K REQUIREMENTS

For an employer to offer a valid Roth 401k plan:

  • The employer must also offer a traditional 401k plan.  Designated Roth accounts cannot exist without an accompanying pre-tax elective deferral plan
  • Participants must be able to designate some or all of their elective deferrals as Roth 401k contributions
  • The employer must include designated Roth contributions in the employee’s gross income (IRC 402A(a)(1))
  • Roth contributions must be tracked and their records kept in a separate account, with any applicable earnings and losses allocated to that Roth account

EMPLOYER CONTRIBUTIONS

Employers may not make contributions to a designated Roth account.  Any employer contributions, such as matching or profit-sharing contributions, must be treated as pre-tax contributions and added to the participant’s pre-tax account.  (However, special rules apply for in-plan rollovers to a Roth accounts)

DISTRIBUTIONS FROM ROTH 401K ACCOUNTS

As with a traditional 401k plan, participants may only receive distributions from their Roth 401k accounts on (if permitted under the plan’s terms):

  • Terminating employment
  • Death
  • Disability
  • Reaching age 59 1/2
  • Determination of hardship

In addition, unlike the Roth IRA, Roth 401k plans are subject to the IRC’s minimum required distributions requirements during the participant’s lifetime

 

ADDITIONAL CONSIDERATIONS FOR ROTH 401K PLANS

Employers may choose to offer the following optional features in Roth 401k plans:

  • Automatic enrollment
  • Employer matching to the accompanying pre-tax account.
  • In-plan rollovers
  • Plan loans.  All of the participant’s Roth and non-Roth accounts are combined when applying plan loan rules

So, who should consider taking advantage of the new Roth in-plan conversion rule?  Here are a few of the most compelling examples:

  • Young savers:  If you are just starting out in your career, you are likely in a lower tax bracket and have a smaller account balance.  Converting some or all of your existing pretax account will set you up for more than 40 years of tax-free compounding.  Just make sure that the move does not bump you into a higher tax bracket.
  •  Someone saving for somebody else:  Assets in a Roth account are bequeathed income-tax free to a spouse or the next generation.  This right allows the recipient to extend the tax-free compounding for many more years.
  •  Someone with a lot of deductions or a large loss:  If you find yourself with a large tax deduction such as a business loss, charitable contributions, or even medical expenses, the taxable income generated by an in-plan Roth conversion is a creative way to fully utilize some or all of these deductions.  A sudden drop in your 401k account value (think 2008) might also present a window of opportunity to convert to a Roth, pay taxes on a greatly reduced amount, and then withdraw the resulting rebound tax-free years later.
  •  Someone concerned about being in a higher tax bracket in retirement:  Many American workers today find themselves in a historically low tax bracket.  So paying taxes on your retirement savings at today’s low rate hedges the possibility of higher tax rates in the future.
  •  Action steps:  First, while Roth in-plan conversions are part of the new IRS rules for retirement plans, they are not automatically available to everyone.  Your employer must amend its plan to allow for them.  If you’re interested in taking advantage of a Roth in-plan conversion, step one is to ask your employer if they have taken the necessary steps to make them available.

While it’s critical to spend the requisite time making sure that you’re saving enough and properly invested for retirement, the tax efficiency of your retirement investment strategy deserves some attention as well because it can have a profound impact on your ability to retire comfortably.  Hence used properly, a Roth in-plan conversion is a powerful new tool that can help you achieve your goal of financial security in retirement.