BALTIMORE, Dec. 6, 2010 /PRNewswire via COMTEX/ -- The average total plan cost for a small retirement plan (100 participants) is 1.33%, while the average total plan cost for a large retirement plan (1,000 participants) is 1.11%, according to the 11th Edition of the 401k Averages Book.
The study shows the small plan average investment expense is 1.26%, while the large plan average investment expense is 1.09%.
Investment Expenses Account For Majority of Total Plan Fees
The recent focus on investment expenses is well reasoned because the study finds investment expenses account for 95% of the small plan's total expenses and 98% of the large plan. "If an employer really wants to cut their 401(k) costs they need to examine their investment related expenses," says David Huntley, co-author of the 401k Averages Book.
Wide Range between Low and High Cost Providers
The range between the high and low total plan costs on a 100 participant plan with a $50,000 average account balance is .57% to 1.76%. "There's a wide range of costs for 401k services and it's important to understand where your plan fits in that range. With new 401k fee disclosure and fee transparency initiatives under way, knowing how your 401k plan fees compare to an average is valuable information," says Joseph Valletta, co-author of the 401k Averages Book.
For the first time the 11th Edition provides sixteen quartile charts to help plan sponsors and their advisors see whether their costs fit in the first, second, third or fourth quartile. The range between the 25th percentile and 75th percentile for the small plan universe is 1.18% to 1.49%. "If you're monitoring plan fees, it will help to understand the difference of being in the first or fourth quartile," says Huntley.
In my August column, I wrote that Roth is wrong, for some people. Basically, my analysis was that, for many, and perhaps for most, participants, their retirement incomes will be so low that they will pay little if any taxes on that income. However, if they were making Roth deferrals while working, they were paying income taxes on the deferred amounts. Thus, in making pre-tax deferrals, they violated one of the basic principles of taxpaying: Always pay your taxes when you are in the lowest bracket.
To determine whether to Roth, a person needs to look at his highest tax bracket (sometimes called the marginal tax rate), both while working and in retirement. Keep in mind that this refers to your personal marginal tax bracket, now and anticipated in retirement, and not to tax rates generally. Since most of us will have less income in retirement, it is possible, perhaps even likely, that we will be in lower tax brackets then, even if the top marginal tax rates are higher.
My previous column generated some questions about whether I had considered the special tax on Social Security retirement benefits. The answer is, I did. That calculation includes a special threshold amount, which must be exceeded before any portion of the Social Security benefits is taxable. In the case of my hypothetical married couple, both age 65, the threshold is $32,000. The calculation is explained in IRS Publication 915. Page 8 shows the calculation for a hypothetical husband and wife in retirement.
My column used an example of a married couple age 65 with $20,000 a year of retirement income from an IRA and with another $15,000 a year in Social Security benefits. The $20,000 per year of retirement income was based on a $400,000 IRA, which was being withdrawn at the rate of 5% per year (and which, according to a number of experts, has less than a 90% probability of lasting for 30 years). However, there is 25% to 30% probability that one will live beyond 30 years, so it is not an unrealistically low withdrawal rate.
Using the methodology illustrated in the IRS publication, the calculations are:
Thus, it was more tax-effective to make before-tax deferrals rather than after-tax Roth contributions. However, as with many issues, the answer is not that simple; the calculations need to be done on an individual basis. Since there is no easy answer, I can give you some rules of thumb:
1. The taxation in retirement should be based on a reasonable withdrawal rate. At age 65, 4% is recommended and 5% is probably okay, but anything more than 5% creates a significant possibility that the participant and/or the participant's spouse will deplete their benefits in retirement.
2. A participant, and particularly a married participant, should probably have a $400,000 or $500,000 taxable account at retirement. This will give the participant the opportunity to withdraw amounts in the zero and lowest tax brackets, which means that deductions are taken out of the highest tax brackets while working and placed into the lowest tax brackets in retirement.
3. If a plan sponsor makes taxable contributions (for example, profit-sharing contributions and/or matching contributions), then it may make sense to make Roth deferrals, since the taxable employer contributions will result in taxable benefits that will be taxable in retirement. The higher the employer contributions, the more likely that Roth deferrals will be beneficial.
Roth is not a panacea but, in the right situation, it is a valuable tool. In the wrong circumstances, it is an expensive mistake.
Tips for plan sponsor compliance with fee disclosure regs
Recently, the U.S. Department of Labor (DoL) published long-awaited regulations that establish new disclosure requirements for certain service providers to pension plans covered by the Employee Retirement Income Security Act (ERISA). The new rules will require service providers to disclose detailed information about the services they provide; the compensation earned by themselves, their affiliates, and subcontractors in connection with those services; and whether they serve in a fiduciary capacity with respect to the plan.
The new requirements are issued under ERISA Section 408(b)(2), which provides an exemption from ERISA's prohibited transaction rules for "reasonable" service arrangements between plans and parties in interest to those plans. Under ERISA Section 3(14), every provider of services to a plan is a "party in interest" with respect to that plan, and the provision of services between a plan and a party in interest violates ERISA Sections 406(a)(1)(C) and (D) unless the arrangement complies with the conditions under the Section 408(b)(2) exemption: (i) the services are necessary for the establishment and operation of the plan, (ii) no more than reasonable compensation is paid for the services, and (iii) the services are provided pursuant to a "reasonable arrangement" The new disclosure requirements must be met in order for any service arrangement involving a covered provider to qualify as "reasonable."
If a service arrangement does not comply with conditions under ERISA Section 408(b)(2), the plan fiduciary approving the service arrangement could be deemed to have caused the plan to engage in a prohibited transaction. A fiduciary who breaches that duty is potentially liable to the plan for resulting losses. The service provider participating in this prohibited transaction also could be liable for excise taxes under Section 4975 of the Internal Revenue Code.
To protect plan sponsors that do not receive the required information, the DoL imbedded a class exemption that applies if several conditions are met, including requesting the required information from the provider and notifying the DoL.
While most of the burden of complying with the regulations likely will fall on providers, plan sponsors should take a number of steps to ensure that they can comply with the new regulations when they become effective in July of 2011, including:
Developing a compliance protocol now will go a long way toward helping plan sponsors avoid the pitfalls of ERISA violations down the road.
NEW YORK, NY, January 13, 2011 -- Mercer has published its "10 for 2011" checklist of New Year's resolutions that US defined contribution (DC) plan sponsors should make now to address investment and plan-design concerns, fulfill fiduciary responsibilities and help participants meet their retirement objectives.
2011 is likely to be a year of transition as the economic recovery slowly gains stronger footing. Despite the improved economic outlook, however, baby boomers face meaningful challenges as they begin the transition to retirement, while younger workers continue to struggle with prioritizing retirement over short term financial needs. Sponsors have the challenge of constructing programs that address the very different needs within their participant populations while complying with a new round of significant regulatory requirements.
"Investment line ups continue to evolve as plan sponsors work to best meet the needs of participants," said Toni Brown, Partner in Mercer's Investment Consulting business. "For 2011 in particular, sponsors may want to consider offering an inflation hedge option; evaluate spend-down products that seek a balance of growth, capital preservation, and liquidity; and look to October for the results of the Federal government's study on stable value wrap contracts."
"Over the past several years, there has been greater policy attention and regulatory scrutiny around DC plans as these become the sole retirement vehicle for many Americans," said Amy Reynolds, Partner in Mercer's Retirement, Risk and Finance business. "Plan sponsors are continuing to evaluate Roth options and other low cost design features while evaluating the impact of recent automation trends. We foresee that 2011 is going to continue to be a challenging year as new disclosure rules will be a key area of focus for sponsors and their record keepers. Looking forward, we expect continued focus by participants and regulators on defined contribution plans. Sponsors need to stay abreast of changes and trends, and respond appropriately."
Mercer's "10 for 2011" New Year's resolutions for DC plan sponsors:
New rules are coming in 2012. Determine what's required, who's responsible and how to integrate the new requirements with other plan communications.
Establish a policy for ongoing fee benchmarking. Receive all required disclosures. Document your oversight in a fee policy statement.
3. Stable Value
A joint study by Federal regulatory agencies (to be completed by October 2011) will determine whether stable value wrap contracts are exempt from the swap restrictions of Title VII of the Wall Street Reform and Consumer Protection Act (current wraps are grandfathered). Should capacity exist, make increased diversity in your line up a priority in 2011.
Consider adding a diversified inflation hedge option to your line up. Evaluate a diversified option versus a Treasury Inflation-Protected Securities (TIPS) option. Near-retirees benefit most from inflation hedging options.
New retirement income products and modeling tools continue to hit the market. Plan sponsors should understand the available solutions to determine if one or more are appropriate for their demographics.
Investment performance is critical for near-retirees. Do their investment strategies match expected spend-down needs? Would retirement planning seminars and other assistance reduce financial anxiety (and its drag on productivity)?
7. Roth 401k
In tough economic times, consider a low-cost plan enhancement, such as a Roth, that expands financial opportunities for participants.
Accounts and/or Investment Advice
Should you offer participants advice or managed accounts (or both)? Should you take advantage of improved access to custom target date funds, which allow tailored glide paths based on your core options?
"Set it and forget it" doesn't work for plan sponsors! For example, should auto-enrollment contribution rates be increased? Are vesting and withdrawal provisions still appropriate for your organization?
The Internal Revenue Service and Department of Labor are focusing on defined contribution plan compliance and recommend periodic review of plan operations both against the terms of the plan and against governmental requirements.
Issued by: FinancialPlanners.net
Date: Friday, January 14, 2011
Senior financial planners are key to a successful retirement, especially since Americans are increasingly reaching the age of retirement without the funds to do so comfortably
BOSTON, Jan. 13, 2011 -- With the baby boomer generation nearing retirement age, independent financial planners are in high demand. These advisors are much like other professionals in the field; however, they generally specialize in the fiscal situations, needs and services that are unique to senior citizens. More often, people are nearing retirement age without the proper savings. Senior financial planners insist that is it never too late to seek advice to develop a strategy of money management.
The older people get, the more important it is to handle financial planning. This is because the working years are dwindling along with the time to save for retirement. Senior financial planners can help sort out the best ways to retire comfortably. When talking to a planner, there are many items to address. If the client is still working, how much longer should they do so? How will the impact of certain benefits, such as Social Security, change when retiring at different ages? When should contributions be made to a traditional or Roth IRA and when should 401k withdrawals begin?
Parents' roles change as they and their children age. They can consider their life insurance plans and their home. As children get older and become self-sufficient, life insurance policies can be scaled back. A large house also can be downsized. If there are many rooms sitting empty, it can be sold and a smaller one can be purchased to save on monthly expenses. This also gives the opportunity to move to a climate that is more desirable. Another housing consideration is assisted living facilities.
Health insurance must also be considered. Depending on an individual's situation, perhaps working for even a few more years to stay on an employer plan may have a large impact on future financial planning. Health care is often overlooked when considering expenses in retirement, especially since Medicare does not cover all costs.
The details of planning for retirement can be complex and seem daunting. Working with senior financial planners can help take the worry out of this important area and make retirement successful and comfortable.