NAPA Net » ‘Out’ Takes

NAPA Net » ‘Out’ Takes:Nevin Adams •7/8/14 •
My first car wasn’t anything special, other than it was my first car. It was an older model Ford, ran reasonably well, with one small problem — it went through oil almost as quickly as it did gasoline. At first I attributed that to being a function of the car’s age, but as the leakage grew, I eventually dealt with it by keeping a couple of quarts of oil in the trunk “just in case.” Eventually, I took the car to a dealership — but by the time they finished estimating the cost of a head gasket repair, let’s just say that, even on my limited budget, I could buy a lot of oil by the quart, over a long period of time, and still be ahead financially.

“Leakage” — the withdrawal of retirement savings via loan or distribution prior to retirement — is a matter of ongoing discussion among employers, retirement plan advisors, regulators and policy makers alike. In fact, EBRI Research Director Jack VanDerhei was recently asked to present findings on “The Impact of Leakages on 401(k) Accumulations at Retirement Age” to the ERISA Advisory Council in Washington.

Ida May Fuller, the first recipient (Photo credit: Wikipedia)

EBRI’s analysis considered the impact on young employees with more than 30 years of 401(k) eligibility by age 65 if cashouts at job turnover, hardship withdrawals (and the accompanying six-month suspension of contributions) and plan loan defaults were substantially reduced or eliminated. The analysis assumed automatic enrollment and (as explicitly noted) no behavioral response on the part of participants or plan sponsors if that access to plan balances was eliminated.

Looked at together, EBRI found that there was a decrease in the probability of reaching an 80% real income replacement rate (combining 401(k) accumulations and Social Security benefits) of 8.8 percentage points for the lowest-income quartile and 7.0 percentage points for those in the highest-income quartile. Put another way, 27.3% of those in the lowest-income quartile (and 15.2% of those in the highest-income quartile) who would have come up short of an 80% real replacement rate under current assumptions would reach that level if no leakages are assumed.

The EBRI analysis also looked at the impact of the various types of “leakage” individually. Of loan defaults, hardships and cashouts at job change, cashouts at job change were found to have a much more serious impact on 401(k) accumulation than either plan loan defaults or hardship withdrawals (even with the impact of a six-month suspension of contributions included). The leakages from cashouts resulted in a decrease in the probability of reaching an 80% real replacement rate of 5.9 percentage points for the lowest-income quartile and 4.5 percentage points for those in the highest-income quartile.

Advisors take note: that effect from cashouts — not loans or hardship withdrawals — turns out to be approximately two-thirds of the leakage impact.

However, and as the testimony makes clear, it’s one thing to quantify the impact of not allowing early access to these funds — and something else altogether to assume that participants and plan sponsors would not respond in any way to those changes, perhaps by reducing contributions,¹ potentially offsetting some or all of the prospective gains from restricting access to those funds.

Because ultimately, whether you’re dealing with an old car or your retirement savings account, what matters isn’t how much “leaks” out — it’s how much you put in, and how much you have to “run” on.

Footnote

1. An EBRI/ICI analysis published in the October 2001 EBRI Issue Brief found that, “on average, a participant in a plan offering loans appeared to contribute 0.6 percentage point more of his or her salary to the plan than a participant in a plan with no loan provision.” Testimony provided to the ERISA Advisory Council testimony notes that it’s likely that a similar relationship exists with respect to the availability of hardship withdrawals. See “Contribution Behavior of 401(k) Plan Participants,” online here. ↩

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Study shows how to fix big flaw with 401(k) plans

retirement (Photo credit: 401(K) 2013)

CBS News:
By 

STEVE VERNON / 

MONEYWATCH/ October 1, 2013, 7:39 AM

(MoneyWatch) Most 401(k) participants plans are on their own when it comes to deciding how to turn their retirement savings into reliable, lifetime income. ... Most employers pay retiring employees a lump sum from the 401(k) plan and don't provide any help with the critical task of generating retirement income from that savings. 

... To set the stage for future changes, a new study from the Stanford Center on Longevity (SCL) and the Society of Actuaries (SOA) shows employers how they can help their older workers plan for a secure retirement. (Disclosure: I was the primary author of this report).

• 3 ways to turn your IRA and 401(k) into a lifetime retirement paycheck
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What are the challenges?

The long-term shift from traditional pensions to defined contribution and hybrid defined benefit plans places significant responsibility on retirees to generate lifetime retirement income. For example:

• Given people's longer life expectancy these days, the money set aside for retirement may need to last a long time -- potentially 20 to 30 years or more.
• Market volatility complicates the challenge of managing savings in retirement. Since 1987, there have been four major market meltdowns. Retirees can expect -- and should plan for -- more meltdowns.

• 

  English: Proportion of pay to save. (Photo credit: Wikipedia)

  Many employees don't know how to calculate the amount of savings they need to generate adequate income during their retirement. They often guess at this amount, and they usually guess too low. 



English: Retirement savings for various periods with squirrel and nut analogy (Photo credit: Wikipedia)

• There's also evidence that retirees are doing a poor job of managing retirement risks; many lack a formal plan to generate retirement income from their savings, and as a result, they're planning to spend down assets at an unsustainable rate. Others are under-spending in retirement for fear of running out of money, leaving them with less money for necessary expenses.

These challenges could all be addressed if 401(k) plan sponsors provided retirement income programs within their 401(k) plans instead of just pre-retirement investment vehicles. So why aren't more employers offering such programs? The primary reason seems to be how plan sponsors view their defined contribution plans. According to one study, 91 percent of plan sponsors view them as savings plans, while only 9 percent view them as vehicles for providing retirement income.

A cultural shift is needed: Employers and plan sponsors need to commit to operating their 401(k) plans not just as a way to save for retirement but as plans that help employees before and during their retirement.

Help is on the way

Several reputable financial institutions offer an array of retirement income products, including AllianceBernstein, Fidelity Investments, Financial Engines, Great-West Insurance, Guided Choice, Income Solutions, Prudential, Schwab, Transamerica, UBS and Vanguard. Many of these products and services are available on the platforms of 401(k) plan administrators, such as AonHewitt, Fidelity Investments, J.P. Morgan, Mercer, T. Rowe Price, Vanguard, Wells Fargo and Xerox/Buck. The bottom line is that plan sponsors now have realistic retirement income products they can offer in their 401(k) plans.

The SCL/SOA study provides employers with guidelines for selecting the products and services that employers can offer in their 401(k) plans and implementing a successful program of retirement income. The report describes common retirement income generators (RIG), such as annuities and systematic withdrawals, and provides projections of the amounts of retirement income that each RIG might generate. These projections show that a retiree's choice of a RIG can have a significant impact on the amount of income they'll receive, when they initially retire and throughout their retirement.

One important conclusion from the SCL/SOA study is that plan sponsors can significantly increase the amount of retirement income employees might receive by offering retirement income products that come with institutional pricing instead of the standard retail pricing individuals have to pay for such plans. Institutionally priced products have the potential to increase retirement incomes by five to 20 percent.

Plan sponsors and employers are uniquely positioned to help their employees convert their retirement savings into income without any economic incentive that might bias individuals' decision-making. This objectivity will help older workers retire with confidence and security.

If this scenario sounds promising to you, show this blog post to your employer and diplomatically ask them to consider implementing a program of retirement income in your 401(k) plan. Employers often respond to employee requests, and if enough of your coworkers make the same request, you can make it happen.

© 2013 CBS Interactive Inc.. All Rights Reserved.

• Steve VernonON TWITTER »
  

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  For more than 35 years, consulting actuary Steve Vernon helped large employers design and manage their retirement programs. Now he's a Research Scholar for the Stanford Center on Longevity, where he helps collect, direct, and disseminate research that will improve the financial security of seniors. He also delivers retirement planning workshops and has authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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Five 401(k) mistakes to avoid

401k, retire, retirement, retiring, 401(k) plan, money, investment, investing / ISTOCKPHOTO
CBS News:
By 

RAY MARTIN / 

MONEYWATCH/ September 20, 2013, 7:00 AM

(MoneyWatch) Workers in 401(k) plans are required to make important decisions that can have a significant impact on their ultimate retirement savings. Folks relying on their 401(k) as their primary retirement nest egg need to make the right decisions on when to enroll in the plan, how much to contribute, how to invest contributions and how to manage the account.

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Most people have the best of intentions when they contribute to their 401(k), but merely being a good saver isn't enough. Here are some of the common mistakes savers should avoid in order to keep their savings growing in their employer's plan.

1) Not enrolling at the earliest opportunity

The problem is that a lot of workers don't take the steps to sign up and join their employer's 401(k) plan at the earliest opportunity. ... The problem is they've lost out on matching contributions (assuming their employer matches) and on the tax-deferred gains on funds they could have saved and invested. Changing jobs five to seven times over a working career (which is typical) only compounds this mistake.

2) Not increasing contributions

According to industry data, the average contribution percentage for workers saving in a 401(k) is around 6 percent. Most studies that take a measure of what folks need to save over their working lifetimes indicate that workers without a pension will need to save and invest 10 percent or more every year into a 401(k) type retirement plan. These assets combined with Social Security income should be sufficient for retirement. If you enrolled into your 401(k) with a six percent contribution percentage, increase this to at least 10 percent as soon as possible and work towards increasing it from there over time.

3) Not making catch-up contributions

... In 2013 workers can contribute up to $17,500 annually into their employer sponsored 401(k) type retirement plans. But if you're over 50 at any time in 2013 (even if you turn 50 on December 31st 2013), you can contribute an additional $5,500 (which remains unchanged from 2012 limits) for a total contribution of $23,000.

4) Taking a 401(k) loan

Most retirement plan experts agree you should never take money from your 401(k) plan because you are taking money away from what you will need for a financially secure retirement. The biggest risk of borrowing from your 401(k) is that most plan rules require repayment within 30 to 90 days of leaving your employer. That's a disaster for someone who suddenly loses their job. If you don't have the money to pay off the loan it will be included in income as a taxable distribution. If you are under the age of 59 1/2 you'll owe a 10% penalty tax on top of applicable federal and state income taxes. If you don't have the money to pay the tax, the IRS can collect what you owe by deducting it from your remaining balance, virtually wiping out your retirement savings in the plan. Whether or not it's a good idea to take a withdrawal from your 401(k) account ultimately depends on what you are doing with the money, but for the reasons explained here, it's wise to avoid this move, as it can backfire.

5) Not running your retirement numbers

The time to find out you have not saved enough is not after you retire. Now is the time to do some serious number crunching. Calculating how much income your current retirement account and annual savings will generate at retirement is a critical step to ensuring you are on track to achieving your retirement income goals. If your retirement plan offers access to online tools to do this, use them.

© 2013 CBS Interactive Inc.. All Rights Reserved.

• Ray Martin
  

  View all articles by Ray Martin on CBS MoneyWatch »
  Since 1986, Ray Martin has been a practicing financial counselor, providing valuable and practical financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch, and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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Annuitization of 401(k)s: DOL Safe Harbor Addresses Fiduciary Concerns

Employee Benefit Adviser:

By Jerry Kalish

June 24, 2013

This is another of my continuing articles on 401(k) In-Plan lifetime income products.

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But let’s ditch the productization label, and refer to what’s happening with lifetime income concerns as the “annuitization of 401(k) plans.”

Here’s one of the basic concerns employers have with 401(k) annuities – fiduciary responsibility for the selection of an annuity provider or contract for benefit distributions.

The seal of the United States Department of Labor (Photo credit: Wikipedia)

Fortunately, the Department of Labor finalized its Regulation On Selection Of Annuity Providers--Safe Harbor For Individual Account Plans. In brief, the DOL says that a fiduciary can satisfy its responsibilities by:

1. Engaging in an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities;
2. Appropriately considering information sufficient to assess the ability of the annuity provider to make all future payments under the annuity contract;
3. Appropriately considering the cost (including fees and commissions) of the annuity contract in relation to the benefits and administrative services to be provided under such contract;
4. Appropriately concluding that, at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract and the cost of the annuity contract is reasonable in relation to the benefits and services to be provided under the contract; and



The seal of the United States Department of Labor (Photo credit: Wikipedia)

5. If necessary, consulting with an appropriate expert or experts for purposes of compliance with the provisions of this process.

But remember, the so-called “Safe Harbor” does not by itself protect a fiduciary from its responsibility for selecting an annuity provider or contract. A Safe Harbor, in general, only reduces or eliminates a party’s liability if the party performed its actions in good faith or in compliance with defined standards.

So from a practical standpoint: a Prudent Fiduciary should consider hiring a Prudent Expert.

Jerry Kalish is President of National Benefit Services, Inc., a Chicago-based TPA firm. He has been publishing the firm’s Retirement Plan Blog since 2006. He can be reached at jerry@nationalbenefit.com.

This article is for information purposes and should not be considered tax or legal advice. Plan sponsors and participants should consult with qualified tax and legal advisors for the application of the law and regulations to their specific situations.

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Behavioral finance techniques really work in 401(k)s

LifeHealthPro:

BY CHRIS CAROSA

JUNE 6, 2013 • REPRINTS

... I’ve written about the problem of choice overload and the detrimental effect it has on 401(k) plans (see, “4 Proven Strategies to Reduce Choice Overload in 401(k) Plans,” FiduciaryNews.com, June 4, 2013). Behavioral finance has been a “hobby” of mine ever since I started my own firm in the mid-1990s. I like it because it’s true. It’s true when it comes to picking stocks. It’s true when it comes to buying mutual funds. And it’s especially true when designing 401(k) plan investment menu options. 

...[Here's] the real problem with choice overload – it can be the reason why a 401(k) plan fails its annual nondiscrimination test. ... As the name implies, it’s caused by there being too many choices for the participant to process. Instead of making a decision on which fund or many funds to pick, the employee makes an even easier decision – the employee chooses not to participant. ... 

Unfortunately, as we all know, nonparticipation has a dark side for the plan sponsor. It increases the likelihood of failing the nondiscrimination test. ...

See also: For this advisor, it's all academic

Along comes behavioral finance to the rescue. Studies show there are plenty of reliable ways to boost participation and leading providers and their plans are employing them with success (see, “How Plan Sponsors Can Restructure a 401(k) Investment Menu to Increase Participation,” June 5, 2013). The most obvious solution is to simply cut the number of options. 

The best solution, however, requires us to rethink the way we approach the plan itself. Almost since its very inception, the 401(k) plan has been investment-centric. ... The increasing problem, though, has been as investments become more complex, more employees are tuning out their 401(k) plans. Product salesman can regale – and sometimes even confirm – 401(k) plan sponsors to include the latest bells and whistles of alternative investments, annuities or target-date funds, but, to the average employee, that’s all nothing but a bunch of mumbo-jumbo. 

This trend has begun to reverse. We see more and more 401(k) plans adopting the idea of offering a menu of “employee categories” rather than a menu of “investment options.” Sure, in a lot of cases, they contain the same mutual funds (although the total number is well below the industry average). The difference is how the menu is worded. Gone are the catch-phrases of Modern Portfolio Theory (e.g., “asset class,” “style box” or “___-cap” anything) and in are the easy-to-understand personality descriptions like “Do-It-Yourself” and “Do-It-For-Me.” Gone is the concept of “asset allocation” and in is the idea of “aggressive,” “moderate” and “conservative.” 

Again, these new phrases may lead to the same funds, but the end is not the purpose, the journey is. We want more employees to participate – to make the journey. It doesn’t really matter what fund choice they make (well, except for money markets or other fixed income vehicles). The average asset allocation is not very different than the optimal asset allocation in terms of performance. Starting to invest earlier, more often and in greater amounts has a far greater impact on meeting your retirement goal than any particular investment a fiduciary would recommend (and, we all know, only fiduciaries should make those recommendations, but that’s another story).

I’ve seen first-hand the fruits of this new finance – this behavioral finance – reap benefits for companies using it. If you’d like to see a real-life example of a new improved 401(k) investment menu, you can find it here “Adding Categories: A Sample of a New and Improved 401(k) Investment Option Menu,” FiduciaryNews.com, June 6, 2013). Go ahead. Use it. If you like it, you can thank me by buying my book.

About the Author

Chris Carosa

Christopher Carosa, CTFA, is chief contributing editor for FiduciaryNews.com, a leading provider of essential news and information, blunt commentary and practical examples for ERISA/401(k) fiduciaries, individual trustees and professional fiduciaries. With three decades of experience in the investment industry, Carosa has helped create or found a number of financial products and firms including mutual funds, common trust funds, registered investment advisers as well as a billion-dollar trust company. He is also the author of the new book, "401(k) Fiduciary Solutions." Follow Fiduciary News on Twitter and LinkedIn.

Originally published on BenefitsPro. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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