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July 2013

Inside this issue:
> Retirement Readiness is Top Priority
> Plan Sponsor Quiz: Roth Options
> Good Retirement Choices and Actions
> Seeds of Investing
> News from MPRA

Retirement Readiness is Top Priority

Employers are focusing on their employees' financial wellness and retirement readiness in 2013, according to a survey of 425 employers (representing 11 million employees) conducted by Aon Hewitt.

Workers need 11 times their annual salary to have a financially secure retirement, but the average worker has a savings shortfall of 2.2 times their annual salary, reports Aon Hewitt. About 80% of surveyed employers plan to address this gap by making financial wellness a top priority this year. And 86% of sponsors said they would focus communications initiatives on helping employees evaluate and understand their retirement savings needs.

Also, plan design changes are in place or being considered to help employees manage their money when they retire. In-plan retirement income solutions are offered by 28% of sponsors, up from 16% a year earlier. These solutions include managed accounts with a drawdown feature, managed payout funds and annuities. Nearly one-third (30%) of employers who currently do not offer such solutions plan to do so this year.

Other key findings include:
  • The percentage of sponsors who plan to use social media to communicate with employees rose from 6% last year to 18% this year.
  • 52% of employers will use podcasts and 42% will use text messages to educate employees about their retirement benefits this year.
Survey results are at http://tinyurl.com/AonHewittReadiness
The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target date fund is not guaranteed at any time, including at the target date.

Plan Sponsor Quiz: Roth Options

According to the Plan Sponsor Council of America's 55th Annual Survey of Profit Sharing and 401(k) Plans, nearly 50% of plans permit participants to make Roth after-tax contributions to their 401(k) plans. When given the opportunity, 17% of participants made Roth contributions.

Whether your 401(k), 403(b) or 457(b) plan currently offers this feature, or its addition to the plan is just being considered, why not take the following quiz to test your knowledge of this provision that continues to grow in popularity?

Test Yourself
Note whether you think each of the following statements is true or false, then check your answers below.

  1. The income limits that apply to Roth IRAs also apply to Roth retirement plans.
  2. Roth contributions are generally not taxed when distributed.
  3. A 10% tax penalty applies to Roth contributions and earnings if they are distributed prior to age 59½.
  4. Participants may make both traditional and Roth contributions, but the combined contributions cannot exceed the Internal Revenue Service's annual maximum deferral limit.
  5. The ADP nondiscrimination test that applies to traditional 401(k) plans is also required in Roth 401(k) plans.
  6. It is not necessary for a plan to have a designated Roth option available in order for it to allow an in-plan rollover.
  7. Roth accounts must allow for designated Roth deferrals and rollover contributions.
  8. An in-plan rollover can include only amounts that are eligible to be distributed to the participant.
  9. Only investment earnings on rolled-over pre-tax contributions within a plan are taxable.
Answers to Roth 401(k) Rules Quiz
  1. False. Roth features do not limit participation by income.
  2. True, if the distribution is “qualified” (when or after the participant reaches age 59½, on or after the participant's death, or if the participant becomes disabled, and the participant's first Roth contribution was made five or more years earlier).
  3. False. The 10% tax penalty applies only if the distribution is not “qualified.” It is calculated only on the earnings.
  4. True.
  5. True. Roth contributions are considered elective deferrals for the ADP test, but are generally not subject to the ACP test.
  6. False. There must be a Roth account provision in place before an in-plan rollover can be offered.
  7. True.
  8. False. The American Taxpayer Relief Act of 2012, effective January 1, 2013, removed the requirement that rollovers within the plan can consist solely of amounts that are eligible for distribution to the participant.
  9. False. Because pre-tax dollars are being rolled into an after-tax Roth account in an in-plan rollover, the entire taxable amount, not just earnings, is included in the participant's gross income.

Good Retirement Choices and Actions
 -- David M. Montgomery, AIF, CRPS

How did your employees get to work today? They made the choice, then took action to get out of bed, get dressed and drive into work. How does someone get physically fit? They make the choice, then take action to exercise and eat well consistently. The common themes here are making a choice followed up with consistent action to implement that choice. Even if someone thinks they're not making a choice, they're still making a choice. If your employees do not get out of bed and come to work, they're choosing to lose their job. If they don't regularly exercise, they're choosing not to be physically fit.

Our lives are products of our daily choices. If retirement plan participants want to reach a goal, such as retirement, they must be aware of the choices that derail them from that goal. Most often it's the seemingly small choices that will derail them.

One strategy that will help in reconsidering even the smallest purchase is to think about how much the money to buy an item would be worth if you invested it in your retirement. For example, if you invested $1 at 8% return for 20 years it would be worth about $5. That may not seem like much, so let's say you invested $100 instead of spending it. That $100 would be worth almost $500 in 20 years. $2,000 would be worth almost $10,000. That's potentially five times more money to live on in retirement!

I believe we would be more purposeful with our money if cash registers (and “carts” for online purchasing) would give us the total bill in today's dollars AND convert it into the potential dollar amount it would be worth in 20 years at 8% growth. It would certainly make us think twice about our purchases.

Here are a few action items to help your participants with their spending choices:
  1. Look at your total bill when making a purchase, big or small. Then think about how much that money could be worth if you invested it, and ask yourself if those items are really worth the larger future dollar amount. If not, don't buy it or put some of the items back.
  2. Be purposeful with your money. A major piece of what it takes to have the retirement and finances you desire is simple: disciplined choices & behaviors when spending your money.
  3. Determine what your retirement account balance needs to be for a comfortable retirement, and align your current spending / saving habits to reach your retirement goal. If your retirement plan website doesn't have a tool to help you with this, you may consider seeking the help of a financial professional.
  4. Once you find that you're saving money, invest in a more enjoyable retirement lifestyle by increasing your retirement plan savings.

Seeds of Investing

For a copy of this month's Seeds of Investing newsletter, formatted for distribution to retirement plan participants, contact David Montgomery at DMontgomery@m-rpa.com or 813-868-1930.

News from MPRA

  • To further expand the services offered by our firm, Montgomery Retirement Plan Advisors has changed its Registered Investment Advisor and Broker-Dealer affiliation to LPL Financial.

This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

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