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Sponsor News - December 2013

Five Retirement Myths Worth Changing

Actors George Takei and Patty Duke show the 'live long and prosper' sign from the television show 'Star Trek' as they launch a new campaign to help the US Social Security Administration. (Image credit: AFP/Getty Images via @daylife)

Ken Dychtwald, the psychologist who’s carved himself a niche as the guru on the aging of America, held forth at the Retirement Income Summit sponsored by Investment News today.

After a puffy, self-provided video introduction, Dychtwald got down to business on why we need to overhaul our notions on retirement.

It’s no secret that Baby Boomers aren’t saving enough for retirement. Parents of the post-war generation are probably going to be fine, having social safety nets like defined-benefit pensions, Social Security and Medicare. And it also helps that they were prodigious savers.

But with only 7% of workers possessing a guaranteed pension, Dychtwald estimates that some one-third of Baby Boomers will end up in poverty.

“If you’re the most successful one in your family, you’ll be the bank [for your less well-off siblings],” Dychtwald said at the Chicago conference. “There’s going to be a lot of have-nots.” As a result, many of us will have to re-invent ourselves and scrap the conventional notion of a do-nothing retirement at 65. Here are some myths we need to conquer:

The Linear Life Plan. It used to be simple. You got educated, got a job and family, retired and then headed off to cruise heaven. Future retirements will be asymmetric. We may have to work longer or find “encore” careers. The fastest-growing group in employment growth has been those over 55, Dychtwald says, who’ve seen some 4 million employed from 2006 to 2011. Maybe the early-retirement fantasies of the 90s were just a pipe dream.

The Old Retirement Definition. Going cold-turkey on work won’t wash for those who still need to be engaged with social, vocational and cultural networks. When Dychtwald did a survey of what people wanted to do in “retirement,” only 29 percent said they never wanted to work again. Some 39 percent wanted part-time work; 29% wanted to combine work and leisure. And 8% still wanted to work full time.

The Disengagement Policy. Far too many retirees saw retirement as a disappearing act. They will need to re-engage with their community, family and vocation. It can be the time for rekindling relationships, continue learning, mentoring or leave a legacy.

The Static Financial State. With single-digit yields and a low-growth economy, portfolios simply may not last into a potential 10 decades of life. So a “financial rehabilitation” might be necessary. Where will retirement funds come from? The traditional “three-legged stool” of Social Security, personal savings and private pensions may not be enough.

Although it’s easy for observers like Dychtwald to emphasize the importance of planning, not everything can be anticipated. With the future of Medicare and Social Security in play, health-care planning will become paramount. Then there’s the need to do flexible life plans. A combination of strategies that mix insurance products, new income sources and family support will be needed.

Dychtwald described modern retirement planning like a rafting trip down the Colorado River. There are a number of options, but you’re sure to hit some rapids and you will need a trustworthy guide.


Small business owner retirement plans, the bad and the good

By Jerry Kalish

May 20, 2013

Let’s take them one at a time.

The bad: Accordingly to a recent Gallup Pew Research Center survey, 67% of small business owners worry they won’t be able to put away enough money for retirement.

Moreover, a recent report by Jules Lichtenstein, Senior Economist with the Small Business Administration, Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers, finds that business owners are less likely to have a retirement plan than people who work for them.

Here are some of the findings:

  • Only 36% of business owners own IRAs.
  • Only 2% of self-employed individuals have retirement plans.
  • Only 18% of business owners participate in a 401(k) plan.

You can see that “only” is a lonely number.

So why haven’t business owners done a better job preparing for retirement? The reasons are many, but one factor is the misconceptions business owners have about retirement plans.

Here are some of the objections I hear from business owners – with an appropriate response:

  • “Retirement plans are too expensive to set-up and administer.” The 401(k) marketplace provides a wide range of choices, business models, and delivery methods. The business owner has a choice to have a plan is both cost-effective and easy to maintain.
  • “I have to make a contribution every year.” Not exactly. A 401(k)/profit sharing by its very nature generally allows the business owner to make contributions determined each year on a discretionary basis.
  • I have to provide the same contribution to the employees as for me.” Not necessarily. There are allocation methods such as New Comparability which may permit a larger contribution for the owner than for the other employees.
  • “The tax laws will limit my ability to maximize my 401(k) contribution if not enough employees participate.” Again, not necessarily. A 401(k) Safe Harbor Plan may permit the business owner to automatically meet the 401(k) test at a reasonable cost for the other employee.

Here’s the really good part: You can help!



Rules, says, are made to be broken. Yet, as financial planning has grown, collective thinking has coalesced around a few solid pieces of advice. A panel recently set out to debunk some of those rules, and establish new guidelines. Here are a few of the biggest myths they tackled:

  • ; Myth 1: Stick to a firm 4% withdrawal rule. Most panelists seemed to agree that a 4% withdrawal rule was still a good starting point, but they emphasized the need for constant evaluation. For example, in case of a market plunge, advisors might want to skip the annual withdrawal for up to five years, giving clients a longer time period to adjust their expenses.
  • Myth 2: End-of-life costs are too uncertain to plan around. Get insurance for clients wherever you can. If possible, allocate more to premiums -- especially longevity insurance, Medigap and long-term care.
  • Myth 3: Roths do not make sense for wealthy clients. Roth conversions can make sense at any age. In particular, clients whose annual income fluctuates may find a hidden opportunity.
  • ; Myth 4: Wait as long as possible to claim Social Security. In general, panelists agreed that clients should wait as long as possible. But, the decision is very much client-by-client. If you have someone who is not in good health, that person might want to claim earlier.
  • Myth 5: During a decumulation period, withdraw first from taxable accounts, then tax-deferred, then Roths. Research shows that you never want to deplete the taxable account. Charitably inclined clients who are contributing to donor-advised funds may want to have appreciated securities to give, while elderly clients may want to be able to use the step-up in basis for their legacy planning.
  • Myth 6: When retirement rolls around, clients who have saved regularly will be all set. Do not discount a significant adjustment period. Encourage clients to try living a practice retirement. In other words, when they are in their 60s, start doing some of the things they planned to do in retirement, travel more, relocate to a warmer climate, but also keep working, pay off debt and get that emotional adjustment in place.

As we always say, “a myth is as good as a mile.”


Participation rates at all-time high, savings rates not keeping up

By Joel Kranc

July 3, 2013

Employee participation in defined contribution (DC) plans is at the highest levels ever seen, according to a new report. Aon Hewitt says not only is participation high but balances are at pre-recession levels. The flipside is that employee savings rates remain stagnant.

The report, which looked at more than 140 DC plans representing 3.5 million eligible employees found that on average, 78 percent of employees participated in a DC plan in 2012, up from 75 percent in 2011, and 68 percent in 2002. Also average DC plan balances have reached their highest levels since 2006. The average total plan balance in 2012 was $81,240, up significantly from $57,150 in 2008.

“It is encouraging to see more people participating in DC plans--the impact of automatic enrollment has been astounding,” says Patti Balthazor Bjork, Director of Retirement Research at Aon Hewitt. “Companies are definitely moving in the right direction when it comes to encouraging financial wellness among their workers, but there is certainly opportunity to do more.”

It appears that the rise in participation is directly correlated to automatic enrollment. Fifty-nine percent of employers now automatically enroll employees in their company DC plan, compared to just 34% in 2007. On average, participants subject to automatic enrollment had a participation rate of 81%, nearly 20 percentage points higher than those without automatic enrollment.

Unfortunately savings rates are not keeping up with the retirement needs and goals of workers. The average before-tax contribution rate remained flat from 2011 at 7.3% of pay. One of the more problematic findings shows that workers are not saving enough to take advantage of company matching dollars. Nearly 28% of employees contributed below the company match threshold.

“Once they are enrolled in the plan, inertia takes over for many employees and they make few adjustments to their DC plans,” explains Bjork. “Employers can help by coupling automatic enrollment with other features, like contribution escalation, that enable employees to increase their savings rate over time. Combined, these can make a big impact on employees' long-term financial outlook.”

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. This email address is being protected from spambots. You need JavaScript enabled to view it..


A Decade Later, Workers No More Likely to Calculate Retirement Needs

Nearly half of workers age 45 and older have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement—and that’s pretty much how things stood a decade ago.

Statistically, workers are no more likely to have done this calculation in 2013 than in 2003, according to the 2013 Retirement Confidence Survey, though the likelihood of trying to do a retirement savings needs calculation increases with age.

One thing that has changed: Workers of all ages appear to be planning to retire later, on average, than similarly aged workers were in 2003. In particular, the percentage planning to retire at age 66 or older has increased significantly for every age group, except the youngest.

Additional findings from the 2013 Retirement Confidence Survey are available online here.


United States Supreme Court Decision on DOMA

The Defense of Marriage Act (DOMA) is a law stating that for any purpose under federal law, only marriages between a man and a woman will be recognized. For example, if two people of the same gender marry in a state that recognizes same-gender marriage, they would be entitled to receive any benefits offered to a spouse under state law, but they would not be eligible to receive any tax or other benefits offered under federal law. In United States v. Windsor, decided on June 26, 2013, the U.S. Supreme Court decided that this section of DOMA was a violation of the Fifth Amendment right to equal protection and struck it down.

DOMA also contains a provision stating that individual states can refuse to recognize same-gender marriages performed under the laws of other states. The Supreme Court did not strike down this part of DOMA. Currently, same-gender marriages are recognized in California, Connecticut, Delaware, the District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington. In these states people in same-gender marriages are now entitled to receive both state and federal benefits available to spouses or married individuals.

The Supreme Court’s decision leaves open many questions: Does it only apply to federal benefits accrued on or after the date of the decision or is it retroactive? Is a person entitled to federal spousal benefits if he or she marries in a state permitting same-gender marriage but then moves to a state that doesn’t recognize the marriage? In addition to these and other general questions, the decision affects many transactions unique to 401(k) and other retirement plans.

QJSA and QPSA Benefits – Retirement plans are generally required to pay benefits in the form of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity unless either the spouse consents to an alternate form of distribution or, in the case of a 401(k) or other defined contribution plan, the spouse will receive a 100% death benefit (unless waived).

Qualified Domestic Relations Orders – A spouse can receive a portion of a participant’s retirement benefit and is entitled to special rules regarding distribution eligibility and tax treatment.

Eligible Rollover Distributions – Spouses can roll to their own IRA or a qualified plan while non-spouse beneficiaries can only roll to an inherited IRA.

Hardship Distributions – Under the safe harbor rule these distributions are available to pay for medical, tuition or funeral expenses of a participant’s spouse.

Minimum Required Distributions – Spousal beneficiaries in some cases have the option to defer beginning these distributions for a longer period than what is available to a non-spouse beneficiary.

Spousal status is also relevant for other plan purposes, such as application of the prohibited transaction rules, disclosure rules, and other requirements. The Internal Revenue Service and the Department of Labor intend to issue guidance in the near future on how to implement the Supreme Court’s decision in the context of retirement plans. Great-West FinancialSM has established a task force to address implementation issues, and additional communications to our customers will be provided.