Why planning for retirement matters

Planning for retirement is a bit of a numbers game. It’s not just about deciding when you plan to retire, but also estimating how many years you plan to live in retirement. You also have to figure in the cost of healthcare during retirement which could include long-term care.

According to numbers from the National Retirement Planning Coalition, there’s been a significant increase in the life of a 65-year-old over the past generation.

In 1980, the average life expectancy for a 65-year-old man was 79.1 years and for a female it was 83.3 years. In 2010, that number increased by over 3 years.

While 3 years may seem small, it can have a financial impact on those living in retirement.

An example from the from the National Retirement Planning Coalition shows a 21 percent increase.

$50,000 of annual expenses in retirement

  • 14 years in retirement = $700,000
  • 17 years in retirement = $850,000

The example above does not include the cost of healthcare in retirement which can drive up the cost. The Insured Retirement Institute (IRI) and Health View Services estimate the cumulative health care expenses for a 65-year-old man in 201 was $370,000 and for a woman $417,000. That does not include the cost of long-term care.

The majority of workers today depend on individual account plans, defined contribution plans and individual retirement accounts to save for retirement.

IRS Makes it Riskier to Maintain Individually-Designed Retirement Plans

Originally posted by ubabenefits.com

The Internal Revenue Service just made it riskier to maintain a tax-qualified individually-designed retirement plan by eliminating the five-year determination letter remedial amendment cycle for these plans, effective January 1, 2017.

Although determination letters are not required for retirement plans to maintain tax-qualified status under the Internal Revenue Code, virtually all employers sponsoring individually-designed retirement plans have long relied on the Internal Revenue Service’s favorable determinations that their plans meet the Code’s and the IRS’ vexingly complex – and ever-changing – technical document requirements. A plan risks losing tax-qualified status (and all the favorable tax treatment that goes along with that status) if the plan document is not timely amended to reflect frequent, sometimes obscure, Code and regulatory changes. In light of that, the IRS has long offered a program for reviewing and approving those plan documents – often conditioning its favorable determination letter on the employer’s adoption of one or more corrective technical amendments. The current program, established in 2005, has provided for a five-year remedial amendment cycle which effectively extended the period of time during which a plan could be amended under certain circumstances to retroactively comply with the ever-changing qualification requirements. Under this determination letter program, employers have filed for determination letters for their individually-designed plans every five years and had an opportunity to fix plan document issues raised by the IRS on review.

The IRS announced elimination of the five-year determination letter remedial amendment cycle in Announcement 2015-19 and said that determination letters for individually-designed plans will be limited to new plans and terminating plans. A transition rule applies for certain plans currently in the five-year cycle (i.e., employers with “Cycle E” or “Cycle A” plans may still file for determination letters) but, effective July 21, 2015, the IRS will not accept off-cycle applications except for new plans and terminating plans.

The IRS said that plan sponsors will be permitted to submit determination letter applications “in certain other limited circumstances that will be determined by Treasury and the IRS” but did not give a hint as to what those circumstances might be. The IRS intends to periodically request comments from the public on what those circumstances ought to be and to then identify those circumstances in future guidance.

In addition, the IRS said that it is “considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements” which might include providing model amendments, not requiring amendments for irrelevant technical changes, or permitting more liberal incorporation by reference.

Comments on the issues raised in the Announcement – e.g., what changes should be made to the standard remedial amendment period rule, what considerations ought to be taken into account regarding interim amendments, and what assistance should be given to plan sponsors wishing to convert to pre-approved plans – may be submitted to the IRS until October 1, 2015.

Don't Eat the Marshmallow

Originally posted by Troy Hammond on April 14, 2015 on www.linkedin.com.

Having more self-control than a preschooler can lead to more rewards.

Fifty years ago, psychologists at Stanford University conducted an experiment on preschoolers. During this test, researchers placed youngsters in individual rooms and asked each child to sit down in front of a tray containing one marshmallow. The child was given a choice: He or she could eat this marshmallow immediately or wait a little while for the researchers to place a second marshmallow on the tray—an opportunity to enjoy two treats instead of just one.

What did the kids do, what would you do, and what does the ability to delay gratification mean for future retirement success?

While encouraging kids to eat more candy wasn’t the goal of this multi-year study, it eventually led to a powerful conclusion: Children who “passed” the marshmallow test had greater competence and success later on as adults.1 Kids who successfully waited for the second marshmallow showed self-restraint and understood that not all needs require immediate gratification. This example is directly applicable to behavioral finance: Controlling spending now may lead to significant benefits in the future.

Patience is not just a virtue—it may create its own success

There are a few steps you can take today that potentially could lead to greater retirement success tomorrow. They include:

  • Enrolling in your 401(k). By setting aside money from each paycheck before you ever see it, you avoid unnecessary spending.
  • Making a habit of saving and increasing your plan contributions. Some experts say you should save 15% of your pretax income each year for your retirement, including your 401(k) and IRA. If your plan offers any employer matching contributions, take advantage of these as well.
  • Knowing when you may need professional advice. Those who lack confidence in their ability to manage their investments may be more prone to “cash out” at the worst time—at market lows—and wreck their retirement plan. Unless you are comfortable making your own investment decisions and making changes to your account as your retirement date nears, consider tapping professional advice that may be available to you within your employer’s retirement plan.

Self-control in retirement planning is key: By avoiding impulse spending and investing consistently over time to pursue rewards, you may move that much closer to securing your financial future.

1 Walter Mischel, The Marshmallow Test: Mastering Self-Control (New York: Little, Brown & Co., 2014).

Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Top five 401(k) plan trends for 2015

Source: EBA Benefit News 

Benefit advisers and their employer clients hoping to help employees achieve retirement readiness should be paying attention to these top 401(k) plan trends for 2015, according to Robert Lawton of Lawton Retirement Plan Consultants.

Stretch that employer match

A virtually no-cost way for employers to incent participants to contribute more is to stretch their matching contribution formulas, says Lawton. For years 50% of the first 6% was the most common matching formula. Leading edge employers have stretched their matching contributions to 25% of the first 12%, for example.

Expect this trend to continue as employers look for low cost ways to improve their 401(k) plans, Lawton says, adding that all that is required to make this change is a plan amendment and communication materials.

Re-enroll everyone every year

Plans that use auto enrollment, auto escalation and annual re-enrollment into target date funds have plan participation rates in the 90% range, says Lawton, adding that not only does automation work, but annual re-enrollments into target date funds works too. Participants can opt out of a re-enrollment, but Lawton says the vast majority do not. Just as auto enrollment has become commonplace in large plans, Lawton says to expect annual re-enrollment to become the norm in the next few years.

Use outcome based, online employee education

With every plan participant having unique retirement goals, employee education has become more personalized, says Lawton. It’s a trend he says will continue and also expects to see personalized education migrate to predominately online venues. When participants can view 5 to 7 minute learning videos online at their homes with their spouses, outcomes improve, he says. Most employers embrace this type of learning since participants are not pulled away from their jobs and employee education costs are less.

Add Roth 401(k) features

Since it is now possible to convert pre-tax 401(k) accounts into Roth 401(k) after-tax accounts, expect many more employers to offer Roth 401(k) contribution ability and an in-plan conversion feature, says Lawton. The cost of this change is a plan amendment and communication materials, he adds.

Employees paying more fees

A surprising 58% of plan sponsors pass on the record-keeping costs of their 401(k) plans to participants, according to a 2014 Towers Watson survey. Only 23% of surveyed employers pay the entire record-keeping cost. As employer cost pressures continue, Lawton says, expect more employers to pass on all plan related costs to participants.

Obama to push retirement reforms

Originally posted January 20, 2015 by Allen Greenberg on Benefits Pro.

President Obama planned to announce several initiatives at his State of the Union on Tuesday night that, according to the White House, will give 30 million more workers a way to save for retirement through their employers.

The president’s proposals would be funded by closing retirement tax loopholes for the wealthy.

“Americans face a daunting array of choices when it comes to retirement savings. While some workers are automatically enrolled in a retirement savings plan by their employer (with an option to opt out), others have to open an account, manage contributions, and research and select investments on their own,” the administration said in a fact sheet released in advance of the president’s speech.

“Meanwhile, tax loopholes have allowed some high-income Americans to accumulate tens of millions of dollars in tax-preferred accounts that were intended to help workers save for a secure retirement, not to provide tax shelters for the wealthiest few.”

Under Obama’s proposals:

  • Every employer with more than 10 employees that does not offer a retirement plan would be required to automatically enroll their workers in an IRA. Auto-IRAs would let workers opt out of saving, if they choose.


  • Any employer with 100 or fewer employees who offers an auto-IRA would get a $3,000 tax credit. The president also will propose to triple the existing “start-up” credit, so small employers who newly offer a retirement plan would receive a $4,500 tax credit to help them offset administrative expenses. Small employers who already offer a plan and add auto-enrollment would get an additional $1,500 tax credit.
  • Access to retirement plans would be extended to part-time workers. This would happen by requiring employers who offer plans to permit employees who have worked for them for at least 500 hours per year for three years or more to make voluntary contributions to the plan. Employers now are allowed to exclude employees who work less than 1,000 hours per year.
  • Contributions to tax-preferred retirement plans and IRAs would be capped once balances are about $3.4 million, enough to provide an annual income of $210,000 in retirement.

Along those lines, the Investment Co. Institute on Tuesday released a survey that found a strong majority of households — including those with and those without retirement plan accounts — disagree with proposals to remove or reduce tax incentives for retirement saving in defined contribution accounts.

The American Benefits Council said the president’s proposal send a mixed message.

“Retirement savings policy need not be a ‘zero sum game.’ Restricting savings for some workers does not help others achieve retirement security,” said ABC President Jim Klein.

The ABC, echoing the concerns of others in the retirement industry, takes issue with Obama’s proposed contribution cap, saying that once interest rates rise, it would impact far more than the handful of high-income Americans with outsized IRA account balances. The cap, according to the White House, would provide an annual income of $210,000 in retirement.

“Portraying the president’s proposal as limiting retirement plan balances to ‘about $3.4 million’ is very misleading,” Klein said. “In fact, the proposal limits annual benefits that can be paid at age 62. In today’s extremely low interest rate environment, that equates to about $3.4 million. But given historical interest rates the government uses for pension calculations, the allowable account balance for a 35-year-old worker would be about $300,000.”

That said, the ABC commended Obama for trying to find ways to make it easier for smaller employers to expand access to retirement plans.


Part-time employment adds leg to traditional retirement stool


Source: Employee Benefit News

You have probably have heard about the three-legged stool approach to retirement planning. Historically, financial planners have advised that retirees could expect to derive their retirement income from three sources: Social Security, corporate retirement plans and personal savings.

It was generally understood that each source of funds was responsible for providing one-third of the total living expenses required in retirement. Over the years the three-legged stool approach has been modified for a number of reasons:

  • The disappearance of defined benefit pension plans (only 18% of workers currently have access to such a plan);
  • An increase in the age required to collect a full Social Security benefit;
  • The soaring costs of health care; and
  • The expectation that many pre-retirees may not reduce their standard of living when they retire. In other words, many workers are expecting 100% income replacement in retirement.

In order to meet the 100% income replacement requirement, experts estimate that 25% of retiree living expenses will need to come from corporate retirement plans, 25% from Social Security and 50% from personal savings. However, it is becoming evident that most baby boomers have not saved, and will not save,  nearly enough to fund the retirement they expect. As a result, it may become necessary to add a fourth leg to the stool: part-time employment in retirement. This new approach assumes that income will flow in 25% increments from each source.

Surprisingly, nearly 75% of pre-retirees over the age of 50 in a recent study say they have a desire to work while retired. This is probably a good thing, since most will have to. Lack of corporate retiree health care, lifestyle expectations and a much lower savings rate than required will force most baby boomers to continue working.


Workforce participation: Entering later, staying longer

Originally posted October 3, 2014 by Nick Otto on http://ebn.benefitnews.com.

Retirement patterns are changing globally. As a result, providing employees greater retirement security and financial literacy can help employers cultivate a less stressed, healthier and more engaged workforce.

To fend off employee concerns about retirement savings, Shane Bartling, a senior retirement consultant at Towers Watson, says benefits managers should work to use impactful approaches to set smart retirement savings habits.

“Showing employees the age when their resources will maintain their lifestyle [and their] financial independence, provides a clear, personal and emotional motivation to save,” he says. That pre-retirement sweet spot, which the consultant firm dubs “the FiT Age,” can be reinforced with “emotionally impactful, personalized communications to drive behaviors, since auto-enrollment and auto-escalation may fall well short of what is needed.”

During the mid-to-late 20th century, labor force participation rates dropped for older workers and rose for younger ones. These trends have recently reversed, especially among men and younger workers.

More recently, a chart from the Senate Budget Committee shows that almost 1 in 4 Americans in their prime working years, between the ages of 25-54, are not working which could drastically affect changes in how and when an employee can eventually retire.

The trend of longer working careers is expected to continue, possibly even intensifying, according to recent Towers Watson survey results. On the other hand, those who are unemployed today require more and more education, resulting in many young adults putting off a potential job in favor of additional education. Typically, employees delay or take a break from labor force participation by spending more time in school.

Meanwhile, to assist employees to build better saving habits, Bartling advises that employers educate the advantages of increased tax efficiencies for workers which would provide for a stronger retirement. “Tax treatment of Social Security and post-retirement medical premiums makes Roth 401(k) and health savings accounts highly attractive for many workers, including [those in] middle income levels; tax efficiency alone may pay for a year of retirement,” he says.

“The risk of a workforce that is stuck, due to employee retirement financial shortfalls, merits re-examining how benefits are delivered,” he adds.  “Evaluate the business case for more efficient retirement benefit delivery,” adding that just matching contributions may not be the most efficient way to deliver benefits.

Many of us get forced to retire; How to prepare yourself to handle a tough transition

Originally posted September 24, 2014 Wednesday by Rodney Brooks in USA Today, First Edition, Money; Pg. 3B and on http://www.ifebp.org.

That retirement you’re looking forward to in five years: Be prepared for it sooner than you expect.

Numerous surveys have shown that people think that they are going to retire later than it happens. The two big reasons: health issues and losing your job. According to the Employee Benefit Research Institute, 47% of American retirees in a 2013 survey retired before they planned, mostly because of health or disability.

Unplanned early retirement can create havoc with your retirement plans. Those five or 10 additional years of saving were no longer possible. Some may have had to take Social Security earlier than expected.

“I have several clients and families who have gone through this,” says Greg Sullivan, with Sullivan, Bruyette, Speros & Blayney In McLean, Va. “What we are always doing is trying to keep our clients prepared for the unexpected.”

Others are not prepared psychologically.

“Don’t leave your retirement to hopium,” says Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif., author of Wealthy by Design. “Hopium is a foolish hope. It allows people to ignore sometimes unexpected realities, such as unemployment. It keeps people from making a proper plan. If they do ignore it, it leads to financial ruin.”

How to be ready:

Do an assessment. Sullivan says you should look at cash flow, balance sheet, insurance and estate plans to get an idea of where you are today and the impact of earlier-than-expected retirement.

Plan for the unexpected. “If you pre-rehearse those types of contingencies, you are far more likely to make good decisions in an emotional moment,” says Joe Sicchitano, head of wealth planning for SunTrust Bank.

It’s not that different from helping children who are afraid of monsters in the closet, Sicchitano says. “The best solution is turn the light on, and see how big he is, how scary he is.

“Build an emergency fund. “You want to make sure you’ve built an adequate emergency fund,” says Marc Freedman, president CEO of Freedman Financial in Peabody, Mass., and author of Retiring for the Genius. “Six to 12 months of your living expenses,” he says. “If you are 55 and faced with retiring soon, you should be able to do that.

“Consider what you want in retirement. Once people get into their 50s, they need to look at how early they can retire, based on what they want, says Joe Franklin, president of Franklin Wealth Management in Hixson, Tenn. “Determine at what age you are independent enough to say, ‘I can keep working if I enjoy it or leave if I don’t like it.’

“Reduce debt. “The more you can lower your committed expenses, the more flexibility you have,” says Sicchitano.

Maximize contributions to your 401(k) and minimize fees. Jerry Schlichter, partner in the St. Louis law firm of Schlichter, Bogard & Denton, says the more attention you’ve paid to your retirement plan, the better you position yourself for an unexpected retirement. “You want to avoid paying fees that will deplete those assets. The Department of Labor has said a 1% difference in fees over a work life expectancy of 25 years will make a 28% difference in the retirement assets you have. Watch your fees, and make sure they are appropriate. Your company has a duty to make sure you are paying reasonable fees.”


Is it time for a checkup for your client's 401(k) plan?

Originally posted September 19, 2014 by Keith R. McMurdy on http://ebn.benefitnews.com.

As we approach the end of the plan year for most plans, now is a good time for plan administrators and plan sponsors to give their 401(k) plans a quick once over to see if everything is properly in place. The IRS even provides a 401(k) plan checklist with some suggested corrective mechanisms that can be taken to bring plans into compliance.

A good starting place for a compliance tune up is to see if you can answer some basic questions about your plan:

  1.         Who are the trustees?
  2.         Who is the plan administrator?
  3.         Who are the outside service providers and how often are they contacted?
  4.         What are the plan’s eligibility rules and who is responsible for verifying them?
  5.         How are participants notified of eligibility?
  6.         How is plan documentation distributed?
  7.         Where are the plan records kept?
  8.         Who is responsible for preparing and filing the form 5500?

After you get past these, some basic questions about plan administration come into play:

  1.            Who keeps track of contributions and limits?
  2.            How does the plan define “compensation”?
  3.            What is the vesting schedule?
  4.            Are there required contributions from the employer?
  5.            Who is responsible for the discrimination testing?
  6.            Does the plan permit loans and how are they tracked?
  7.            Who is responsible for reporting to participants?
  8.            How are distributions made and who is the contact person?

The reason I bring this topic up is that I was recently working with a client who had one person who was solely responsible for benefit administration. Unfortunately that person passed away suddenly and no other person in the organization could answer any questions about the 401(k) plan. Although it seems like the above information is simple to collect, the company still spent hours and hours recreating the plan history because they neglected to keep a record of how the answers to these questions had changed over the years.

Think of your 401(k) plan as a well maintained car. It needs a check up on a regular basis to keep running smoothly. You have to keep records of what was done and you have to know where the important information is if you need it. Just like your car, you hope your 401(k) plan never breaks down. But in anticipation of a future problem, it is worthwhile to stop and make a record of the responsibility for plan administration and the current status of the plan. That way it will be easier to make repairs if they ever become needed.

How The Marketing of Health Benefits Has Changed


By Mathew Augustine, GPHR, REBC
CEO, Hanna Global Solutions

The advent of state insurance exchanges last year has promoted a paradigm shift in the distribution and sales of insurance programs as part of employee benefit programs. Individuals using their ‘own’ funds to pick from virtual ‘store shelves’ of a wide range of insurance products is not an experience limited to employees of large corporations supported by big technology and service operations anymore. Consumers are making ‘purchase’ decisions as opposed to employees making ‘enrollment’ decisions; choice is being driven from ‘lowest price’ to ‘highest value’; decisions are moving away from employers preselecting a set of comprehensive plans on behalf of their employees, to employees putting together a portfolio of insurance products to suit their specific situation.
Many have compared this paradigm shift to the change that happened in pension plans from defined benefit to defined contribution. This one is even more significant. An employee can make some default decisions (or employers can decide for them) when it comes to 401(k) plans, at the time of enrollment, and then later change fund selections and rebalance their portfolio at any time during the year. This is not the case when it comes to insurance products in an employee benefit portfolio – you have to choose your portfolio at the time of enrollment and are stuck with it for a year until the next open enrollment window.
This places a lot of responsibility on advisors and employers to educate employees and communicate all the benefits and programs that are being made available. It takes the responsibility of employee benefits communication up a level. Classic marketing discipline must be applied to do this right. It is useful to consider the four P’s of marketing – product, place, price and promotion.
Product: A full variety of insurance products can be put together. If offered a range of medical plans, these plans must be complemented by supplemental plans such as critical illness and accident plans so that those choosing high deductible plans can gain protection against catastrophic situations. A young, healthy person should be able to select a low cost, high deductible plan design and redirect the premium savings to a health savings account (HSA) to build a fund for later years of higher utilization.
Place: These products must be offered in an easy to understand, easy to select ‘shelf’. Only those products that are eligible to a person must be presented to him or her, with clear ‘labeling’ of product features and price. That person should also be able to make comparisons among options available, without being limited in their options or decisions being made for them based on some broad generalities.
Price: The benefits manager in a company takes on the role of a product portfolio manager with the responsibility to set the right product-price mix. Use of the defined contribution model of employee cost sharing, with the right combination of options for employees to use their employer contributions, can help realize an employer’s benefit strategy, and help employees make decisions that are appropriate to their family situation and risk tolerance.
Promotion: Clear communication of the benefits program has always been a significant contributor to the level of satisfaction that employees have of their benefits program. The range of options presented, the independent decision making by employees on their choices, and additional products available, all make communication more challenging and necessary. Add to this the compliance overheads of statutory notices and plan documents, the proper promotion of benefit programs requires a professional marketing approach.
The good news is that this marketing approach, if executed well, will deliver results in multiple areas – employee satisfaction, cost control, regulatory compliance, and employee engagement. It is time for HR and employee benefits teams in companies to develop marketing in their skillsets or employ full-time product management or marketing communications specialists to market their employee benefits portfolio.

Download a complimentary copy of the UBA white paper, “A Business Case for Benefits Communications,” click here.