|SAVINGS RATE SHOULD BE 14%
The National Retirement Risk Index (NRRI) estimates that about 50% of working families are at risk of being unable to maintain their current standard of living in retirement. Boston College’s Center for Retirement Research (CRR) studied how much workers would need to save to maintain their pre-retirement standard of living.
CRR researchers concluded in “How Much Should People Save?” that, on average, workers need to look to retirement savings plans for about 35% of their retirement income. To reach that income target, the average required savings rate is 14%, assuming that saving begins at age 35 and retirement is at age 65.
Prudential, which sponsors the NRRI, noted in The Role of 401(k)s in Retirement Income that 401(k) plans can enhance retirement security with matching contributions, automatic enrollment, retirement income modeling tools, and guaranteed retirement income options.
The CRR report is at http://tinyurl.com/CRRSavingRate, and Prudential’s paper is at http://tinyurl.com/PruRetIncome.
For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation. ©2015 Kmotion, Inc.
TOP FIVE NEW YEAR’S RESOLUTIONS FOR RETIREMENT
We always hear the same resolutions when the new year rolls in: lose weight, get organized, travel more, etc. Resolutions for fiduciaries are not something you read about every day, which is why we are counting down the top five resolutions to become a better plan fiduciary in 2015.
- Adopt a Financial Wellness Program. These programs optimize employee participation and action through engaging group and individual guidance. Financial Wellness looks beyond a participant’s retirement plan and provides an individualized blueprint that summarizes goals, objectives and identifies action items to create a well-rounded financial picture.
- Providing Information in Participant-Directed Plans.¹ When plans allow participants to direct their investments, fiduciaries need to take steps to regularly make participants aware of their rights and responsibilities under the plan related to directing their investments. This includes providing plan and investment-related information, including information about fees and expenses, that participants need to make informed decisions about the management of their individual accounts. Participants must receive the information before they can first direct their investment in the plan and annually thereafter. The investment-related information needs to be presented in a format, such as a chart, that allows for a comparison among the plan’s investment options.
- Monitor Your Service Providers.¹ An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements. When monitoring service providers, actions to ensure they are performing the agreed-upon services include:
• Evaluating any notices received from the service provider about possible changes to their compensation and the other information they provided when hired (or when the contract or arrangement was renewed);
• Reviewing the service providers’ performance;
• Reading any reports they provide;
• Checking actual fees charged;
• Asking about policies and practices (such as trading, investment turnover, and proxy voting); and
• Following up on participant complaints.
- Review and Monitor Plan Expenses and Fees.¹ Fiduciaries should ensure that all required fee disclosures are made timely and monitor fees on a regular basis. Fiduciaries should establish a policy for ongoing plan expense and fee monitoring and benchmarking. Also, as necessary, disclose plan fees to participants.
- Be Educated on Prohibited Transactions.¹ Who is prohibited from doing business with the plan? Prohibited parties (called parties in interest) include the employer, the union, plan fiduciaries, service providers, and statutorily defined owners, officers, and relatives of parties in interest. Some of the prohibited transactions are:
• A sale, exchange, or lease between the plan and party in interest;
• Lending money or other extension of credit between the plan and party in interest; and
• Furnishing goods, services, or facilities between the plan and party in interest.
Other prohibitions relate solely to fiduciaries who use the plan’s assets in their own interest or who act on both sides of a transaction involving a plan. Fiduciaries cannot receive money or any other consideration for their personal account from any party doing business with the plan related to that business.
Final Words of Wisdom for 2015¹: Being a fiduciary brings with it many responsibilities as well as potential liability. A fiduciary who does not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. It’s important for all fiduciaries to understand their fiduciary obligations and the steps they can take to limit their exposure.
¹ dol.gov/ebsa. Meeting Your Fiduciary Responsibilities.
FREQUENTLY ASKED QUESTION: HANDLING FORFEITURES
Q: What are some of the key points we need to keep in mind in handling forfeitures?
A: When a plan participant terminates employment, his or her unvested account balance becomes subject to forfeiture. These amounts arise when employer contributions to the participant’s account are not 100% vested.
Most plans provide that forfeitures occur after five consecutive one-year breaks in service. Other plans provide for immediate forfeiture upon distribution of a participant’s vested account balance. In any case, forfeiture provisions should be spelled out in the plan document.
Internal Revenue Service rules specify four ways in which forfeitures can be used. They can:
- Reduce future employer contributions.
- Pay reasonable plan expenses.
- Be allocated among participants as additional contributions.
- Restore previously forfeited participant accounts.
Handling forfeitures is a discretionary function under ERISA, so fiduciaries managing them must act in the best interests of participants and beneficiaries.
As far as timing, the Internal Revenue Code generally requires that forfeitures are to be distributed on an annual basis.
Correction activity, such as removing an erroneous employer contribution, and missing participants may provide challenges to plan sponsors with respect to forfeitures. Other issues may come up in a plan termination. Be sure that your plan document and administrative procedures are fully documented as to how forfeitures will be managed.
See http://tinyurl.com/VanguardForfeitures for a helpful overview of this topic.
SPRING FORWARD TO RETIREMENT
Tips on improving retirement security
In 2015, Daylight Saving Time will begin on Sunday, March 8. By setting our clocks forward one hour, we lose an hour of time. Lost time is one of the opponents of retirement planning, but it doesn’t have to be if you play it smart. The difference between success and failure results from a combination of time, dollars and the application of a few basic concepts.
The sooner you start saving, the more time your savings have to potentially grow. According financial experts, those who can increase their savings each year to about 15% of income by the time they are in their 40’s and 50’s may improve their prospects for a secure retirement.
Still, the idea that many people have of retiring at 62 and walking on the beach is not realistic. In 2013, the typical household approaching retirement had saved only $111,000, an amount that is able to produce $400 a month in income, according to the Center for Retirement Research.¹ Most people will have to work longer, save more, and leave less money to their heirs than previous generations.
Put time on your side
Today, the responsibility for funding retirement has shifted much more to individual workers. In fact, in 2013, three out of four workers relied on themselves rather than a traditional company pension, according to the Social Security Administration. With that in mind, here are three tips for improving your retirement outlook:
- Plan to work longer – One of the most powerful ways to increase your likelihood of a comfortable retirement is to continue to work past normal retirement age. By delaying retirement until 70 from 62, you not only are able to put more money aside in your retirement plan, but you also increase your monthly Social Security benefit by 76%.²
However, it’s always important for employees to update job skills that employers will value in the future.
- Save more in your 401(k) – If you are due for a raise of 2% to 4%, you should consider increasing your 401(k) deferrals by 1%, which you won’t even feel in your pocket. Adding an additional 1% a year to your 401(k) plan (up to the plan limit) could result in having as much as 28% more to spend in retirement, depending on your income.³
- Look for ways to budget – Almost everyone can find an extra $50 a month to cut in the budget, such as a product or service that you don’t enjoy or use as much anymore. (Check out the article above for ways to generate $250 a month in savings that could be redirected to a retirement account.)
Retirement planning is all about taking advantage of time, and taking responsibility to set goals and stick to them. Yes, it takes some commitment and effort, but financial security is really worth it!
¹ Alicia Munnell, Charles Ellis and Andrew Eschtruth, “Falling Short: The Coming Retirement Crisis and What to Do About It,” Center for Retirement Research at Boston College, December 2014.
² Social Security Administration, “When to Start Receiving Retirement Benefits,” January 2014, http://www.ssa.gov/pubs/EN-05-10147.pdf.
³ Jack VanDerhei, “The Pension Protection Act and 401(k)s,” The Wall Street Journal – Employee Benefit Research Institute, 2008.
NEWS FROM MRPA
- MRPA welcomes Steve McCormack to its team as Client Relations Manager. He comes to MRPA from over eighteen years with T. Rowe Price.
- Mike Montgomery will be speaking at the fi360 Insights 2015 Conference in Orlando, Florida on Fiduciary Best Practices for Non-ERISA Defined Contribution Plans, March 18-20, 2015.
- Mike Montgomery will participate in two panel sessions at the National Association of Plan Advisors (NAPA/ASPPA) conference in San Diego, March 22 – 24, 2015. One presentation will address the Revolution of Fiduciary Services, and a second session will address current regulatory trends and potential congressional action regarding Multiple Employer Plans (MEPs).
No strategy assures a profit or protect against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.