March 2014

Inside this issue:

Considering a Safe Harbor Retirement Plan

It may be advantageous for certain plan sponsors to consider adopting a safe-harbor design for their retirement plan. In a standard 401(k) plan, discrimination testing often limits the contribution levels of highly compensated employees using a formula that considers the contributions of non-highly compensated employees. Adopting a safe harbor retirement plan design permits an employer to avoid this discrimination testing (the testing is deemed met). By making a safe harbor contribution, highly compensated employees can defer the maximum amount allowed by their plan and Internal Revenue Code limits, without receiving any refunds.

General rules for all safe harbor contributions include the following:

  • Safe harbor contributions are 100% vested.
  • There may be no allocation requirements imposed on safe harbor contributions, for example, a 1,000-hour service requirement or a last day employment rule.
  • All eligible participants must receive a written notice describing the applicable safe harbor provisions between 30 and 90 days before the beginning of the plan year. This notice must be provided for each year the plan will be safe harbored.
  • One of two types of employer contributions must be met or exceeded.

Generally, there are two types of employer safe harbor contributions: 1) the non-elective contribution, which is a 3% contribution to all eligible participants, or 2) a matching contribution to participants who are contributing to the plan. For the matching contribution, there are two options from which to choose -- either the basic or the enhanced match. The basic safe harbor matching contribution is defined as a 100% match on the first 3% of compensation deferred and a 50% match on deferrals between 3% and 5% of compensation. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100% of the first 4% deferred.

To learn if a safe-harbor feature is appropriate for your plan, contact a consultant at Montgomery Retirement Plan Advisors.

Saving is Always in Season

This time of year, most of us look forward to summer, when the weather warms and everything slows down. But saving for retirement -- which is by far your largest lifetime expense -- takes continuous focus throughout the year.

Summer is a time when we can put our feet up and relax with friends and family. Even when the living is easy, you need to maintain discipline to build a long-term retirement strategy. Putting off your retirement savings for even a few months may add to more financial stress.

Following are four ways to stay engaged with your retirement planning:

1. Calculate the money you’ll need
Not knowing how much money you’ll need in retirement is like firing up the backyard grill for 35 friends and not knowing how much propane is in the tank. This may come as a surprise, but 57% of American workers age 55 plus have never used a retirement calculator.1 Many experts believe that retirees will need 75% to 100% of their pre-retirement income to live comfortably. Most financial institutions have a retirement calculator on their website to figure out your specific retirement income needs. Check the website of your company’s retirement plan provider or call their employee help line for guidance on where to find the tool.

2. Start early
Contributing early to a retirement plan means that you can set aside less money to achieve the same or better income in retirement. That’s because the power of compounding allows your assets to generate earnings. Look at how much money a 26-year-old gives up by delaying the start of contributions just one year:

The Cost of Waiting

Starting Age
Your Contributions by Age 65
Your Account Value at Age 65
The Cost of Waiting One Year

This is a hypothetical illustration intended to show how a one-year delay in investing might affect savings. It is not intended to depict the performance of any particular investment. Assumes monthly contributions of $100, an annual 8% hypothetical rate of return in a tax-deferred account, retirement at age 65, and no withdrawals. Savings totals do not reflect any fees/expenses or taxes along the way. The accumulations shown would be reduced if fees and taxes had been deducted.

3. Increase your contributions each year
If you increase your contributions by $10 each year (so that in the second year you’re adding $10 per paycheck, then $20 per paycheck in the third year and so on), by the end of year 40 you’ll have an additional $213,200 to spend, even without considering your investment return – assuming you don’t exceed the maximum annual contribution limit for qualified plans.

4. Don’t waver
Constantly adjusting your mix of investments according to what is heard on the news, stopping and starting your contributions, and taking out loans against your retirement plan are just a few of the behaviors that can cripple your results.

- David M. Montgomery, AIF®, CRPS

1. Source: Society of Human Resource Management, September 2011.

Are You Distributing Your Summary Plan Description

A summary plan description (SPD) describes the key provisions of an employer’s retirement plan and participant rights. SPDs must be disseminated to newly eligible participants within 120 days after a new plan is established or within 90 days after a participant becomes eligible to participate in an existing plan. In addition, SPDs must be disseminated to all participants once every five years unless there have been no amendments to the plan during that period. The DOL issued final regulations on electronic delivery that indicate an SPD can be delivered through an electronic medium if all the requirements are satisfied. Contact your plan consultant for assistance with your SPD or other plan-related documents.

The Importance of Qualitative Review

We believe that qualitative review of retirement plan investments helps support the quantitative analysis utilized in our firm’s investment monitoring tool. Qualitative review can provide color and insight into the portfolio and the investment performance. This aspect of the process is structured in its approach and designed to identify the factors that may ultimately drive future investment performance. The three primary qualitative factors include: People, Process and Philosophy.

Is there an experienced team with the ability to manage both philosophy and process? You must weigh factors such as changes within the firm’s leadership and organization as well as the experience and ability of a portfolio manager.

Is the process clearly defined and consistently applied? Is the process sound and established? The implementation of a strategy may be just as, if not more important than, the ideas and research supporting it.

The research and ideas must be coherent and persuasive with a strong rationale supporting past results and future performance expectations.

To use a practical example, even if an investment scores impressively on all quantitative metrics, if the primary manager is gone, the investment firm is in disarray and the organization appears to have built its past success on a string of hunches, those factors probably should be taken into consideration in assessing whether to invest.

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 or 813-868-1930.

News from MRPA

Mike Montgomery will be participating in a panel discussion on the evolving role of the retirement plan fiduciary advisor at the LIMRA Retirement Industry Conference in Chicago on April 11, 2014.

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.

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