August 2014

Inside this issue:

Automatic Features Have Positive Impact

More participants, especially young, lower-income and minority workers, are likely to have healthier retirement savings thanks to automatic features in their retirement plans. Vanguard’s How America Saves 2014, which included data on 3.5 million participants, reports that automatic enrollment and automatic contribution rate increases continue to rise in popularity among sponsors and are improving participation and savings rates.

Automatic enrollment growth continues
More than one-third of the plans for which Vanguard provides recordkeeping had automatic enrollment by the end of 2013. Almost two-thirds of employees who participated in their 401(k) plan for the first time in 2013 were in automatic enrollment plans.

  • Although many auto-enrollment plans (69%) applied this feature only to new hires, now half of those plans also apply it to eligible employees who are not participating.
  • Most auto-enrollment plans also automatically increase participants’ contribution rates each year.
  • The participation rate for those who were automatically enrolled was 82%, versus 65% for those who enrolled voluntarily.

Target date funds remain primary default
Nearly all auto-enrollment plans offer a target date fund (TDF), other balanced fund or managed account as the default investment. Of those, 90% use a TDF.

  • At the end of 2013, 40% of participants invested only in an automatic investment option. Of this group, 31% invested in one TDF, 6% were in a balanced fund, and 3% were in
    a managed account.
  • About 55% of all participants invested in TDFs, and of those participants, nearly 56% had their entire account in a single TDF.

Participation stayed steady
In 2013, the average plan participation rate was 76%, which was largely unchanged from recent years. The average deferral rate was 7.0%, which has changed little over the past five years.

Roth 401(k) feature usage grew
More than half of the plans had adopted a Roth 401(k) provision by the end of 2013. In such plans, 13% of participants made Roth contributions. The usage rate has grown slowly but steadily over recent years.

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ERISA Fidelity Bond versus Fiduciary Liability Insurance

Plan sponsors often ask, “Is an ERISA fidelity bond the same thing as fiduciary liability insurance?” The answer is no, they are not the same. The two insure different people and have different requirements under the terms of ERISA.

An ERISA fidelity bond is required under ERISA Sec. 412. Its purpose is to protect the plan, and therefore the participants. It does this by ensuring that every fiduciary of an employee benefit plan, and every person who handles funds or other property of the plan, be bonded. This protects the plan from risk of loss due to fraud or dishonesty on the part of the bonded individuals. The amount of the fidelity bond is 10% of the plan assets (with a $1,000 minimum) and is capped at $500,000 (or $1,000,000 for plans with company stock).

Fiduciary liability insurance protects the fiduciaries (not the plan or participants) from a breach of their fiduciary responsibilities with respect to the plan. Remember that fiduciaries may be held personally liable for losses incurred by a plan as a result of their fiduciary failures. Unlike a fidelity bond, fiduciary liability insurance is not required under ERISA. The Department of Labor may ask whether the plan fiduciaries have insurance in the event of an investigation. It’s important that fiduciary liability insurance explicitly covers “ERISA” claims. Review of any policy, including E&O policies, should look for language that may void the coverage in the event a plan has ever been out of compliance (something virtually all plans experience at some point in their existence).

Frequently Asked Question: Plan Record Retention

Question: What are the basics of the law regarding retention of plan records?

Answer: Even if the plan sponsor retains outside recordkeepers or other service providers, the plan sponsor is legally responsible for safeguarding records that support reports and filings required by law.

  • Documents required to be retained are the original signed and dated plan document, all signed and dated plan amendments, and the IRS approval notice. These should be kept until after the plan terminates.
  • Copies of Form 5500 filings should be retained for at least six years after the submission of the annual report.
  • Financial and other reports that support the plan document and operations, such as discrimination testing results, must also be kept for at least six years. This includes administrative committee actions related to the plan and complete census data.

Financial IQ — A 10-Question Quiz to Sharpen Your Money Smarts

See how much you know about how you should be saving and spending by taking this quick multiple-choice quiz (answers and scorecard provided at end).

1. Is it better to pay off your credit cards or add to your savings?

a. It is better to pay down your credit cards before saving
b. It is better to add to your savings before paying off your credit cards
c. It is better to pay the minimum monthly payment on your credit cards first, and then save as much as you can
d. It is better to pay down credit as you save, paying off highest-interest cards first

2. How much of your income should you be saving each month for retirement?

a. 1% to 5%
b. 5% to 10%
c. 10% to 15%
d. 15% to 20%

3. What percentage of your pre-retirement income will you likely need to maintain your lifestyle in retirement?

a. 75% to 100%
b. 20% to 30%
c. 40% to 50%
d. 60% to 80%

4. What does investment diversification3 mean?

a. Dividing your money among stocks, bonds and cash
b. Choosing investments that have different performance characteristics
c. Allocating your portfolio among conservative dividend-paying stock funds, growth and income funds, growth stock funds, and aggressive growth stock funds
d. All of the above

5. Which retirement-oriented investment vehicle is specifically designed to minimize the need to make changes as you approach retirement?

a. Roth IRA
b. Variable annuities
c. Target-date funds
d. Money market funds

6. When does the IRS say you have to start taking withdrawals from your retirement plan or IRA?

a. Age 59½
b. Age 65
c. Age 67
d. Age 70½

7. What percentage of your annual income do most experts say should go toward paying your home mortgage?

a. No more than 10% of gross earnings
b. Up to 28% of gross earnings
c. No more than 33% of gross earnings
d. Up to 50% of gross earnings

8. How often should you rebalance your retirement portfolio?

a. Never
b. Quarterly
c. Annually
d. B or C, depending on market conditions

9. How much of an emergency fund should you set aside?

a. 6 months
b. 2 weeks
c. 2 years
d. 5 days

10. What asset class has, on the whole, produced the best performance results since 1929, but carries the most risk in the short term?

a. Bonds
b. Stocks
c. Gold
d. Baseball cards

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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