Sponsor News - October 2011
Posted 5/19/2011 2:00 AM by Financial Planning Association® member John F. McAvoy, CFP® from Financial Planning Association in Personal Finance, Retirement
#10: "I'm too busy"
So many people want to plan for a better retirement, but they don't have time. They think they'll take care of it tomorrow or the day after that…and before they know it, several years have gone by. Inertia is the hardest thing for most people to overcome. Stop procrastinating and start planning today.
#9: "It's too soon"
It is never too soon! Retirement planning is about making decisions to help you become financially secure. That means that you need to make a conscious decision to spend less than you earn and limit your debt. This is the surest way to financial independence and it is never too soon to start that process.
#8: "It's too late"
It is never too late! There might be options available to you of which you are unaware. Income generating strategies are constantly evolving and there might be a strategy which you have not yet considered. Even if you have a plan in place, it is prudent to review it on a regular basis.
#7: "I don't need to"
"If you fail to plan, you plan to fail." The financial planning process can uncover many potential problems of which one may be unaware. For example, a proper financial plan will examine your cash flow, your insurance coverage, your investments, your estate plan and how taxes effect your financial decisions in all of these areas. The future is always uncertain, but a good financial plan enables one to examine their financial security and develop a contingent plan for those unexpected events.
#6: "My goals are too big"
Many people set goals that are way over their head. This can overwhelm them and prevent them from taking action. Break your big goals into smaller ones. It's like walking up a set of stairs. There is no way you can leap to the top! Each step you take, however, gets you to the top of the stairs. A financial plan can work best when you implement it incrementally over time.
#5: "My finances are a mess"
This is one of the hardest things for many people to face - being in denial and wishing that one's financial situation will solve itself. There are many Americans who have had several jobs over the last decade and have two, three or more 401(k) accounts. Taking the first step to simplifying your financial life may help eliminate some of this stress. A proper financial plan helps you organize your finances and also provides a track for you to follow.
#4: "The Government will take care of me"
Many Americans, especially younger Americans, already recognize that this is not a viable solution. No one knows what government benefits will be available or if they will be modified compared to today. Once again, a prudent solution is to plan for the worst case and then enjoy the benefits of your planning if it does not occur.
#3: "I have enough saved in my 401(k), I'll be fine"
Many Americans have not considered the next step for their retirement program. That is, how will one generate income without running out of assets during retirement? Consideration must be given to the potential effects of inflation, taxes and individual longevity in comparison to your retirement income.
#2: "I don't want to think about it"
The biggest obstacle to financial success is our own behavior. Ignoring the reality of the situation won't solve the problem. Taking the first step toward financial security starts with the gathering and analyzing the facts. It is not easy, but the rewards can be satisfying.
#1: "I don't know how"
There are people who love the tiny details of their financial situation and are not intimidated by the prospect of delving into those details. Most people, however, don't have the time or temperament to understand their financial situation. That is why an objective analysis by a financial planner can provide a window into your financial life that will help you to achieve the goal of financial independence, also known as a successful retirement.
By Lee Barney
May 24, 2011
Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) have proposed the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act (SEAL), which would limit the number of loans that participants can take from their 401(k) to no more than three at a time.
Currently, an employee with an outstanding loan who loses his or her job must pay back the loan within 60 days. The SEAL Act would give the participant until the tax deadline for that year to repay the loan and allow the participant to deduct the early withdrawal penalty from the loan balance.
Further, while those who have an outstanding loan currently may not contribute to their 401(k) for six months, SEAL would lift that ban. And SEAL would ban the use of debit cards linked to 401(k) accounts.
"While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank," Kohl said. "As the frequency of retirement fund loans have gone up, the amount of money people are saving for their retirement has gone down."
Enzi added: "Our bill would allow for a greater period of time for the loan to be paid back, thereby helping families pay back the loan and allowing the fund to be put back into their retirement savings."
According to Aon Hewitt, 28% of 401(k) participants had an outstanding loan in 2010, up from 22% in 2005. The average loan was $7,860.
On July 15, 2011, the Department of Labor (DOL) published a final rule redefining the applicability dates
for both service provider fee disclosures required by ERISA § 408(b)(2), as well as participant-level
disclosures required by ERISA § 404a-5 in plans where participants control investment of their plan
accounts. The DOL is responding to comments indicating that service providers need more time to comply
with 408(b)(2), and plan sponsors need time after receiving the 408(b)(2) disclosures before being
required to produce participant-level disclosures.
The new effective date for service provider disclosures has been moved from January 1, 2012, to April 1,
2012. The effective date for the initial disclosure required by the participant-level disclosure rule will now
be the later of 60 days after the applicability date defined in the current regulation (the first plan year
beginning on or after November 1, 2011), or 60 days after the effective date for service provider fee
disclosure. The first quarterly disclosure required by the participant disclosure rules must be provided no
later than 45 days after the end of the first quarter in which the initial disclosure is required to be
For example, in a calendar year plan, plan sponsors, or other hiring fiduciaries to ERISA plans, should
receive fee disclosures from all covered service providers no later than April 1, 2012. Plan Administrators
in plans that are participant-directed must then provide the initial participant disclosure no later than May
31, 2012. The first quarterly statement required by the participant disclosure rules would need to be
provided no later than August 14, 2012. In a participant-directed, non-calendar year plan with a plan year
ending June 30, the plan sponsor or other hiring fiduciary should still receive the initial fee disclosures
from all of its covered service providers no later than April 1, 2012, as the effective date for service
provider disclosure is not tied to plan year end. The initial participant disclosure would need to be
provided by August 29, 2012, and the first quarterly disclosure would be due no later than November 14,
The DOL stated that it intends to publish a final rule on service provider fee disclosure before the end of
2011 (it is currently published as an interim final rule) and does not expect that any changes it might
make in the final rule will require more time for compliance than is available with the April 1, 2012
effective date. The DOL also indicated that it intends to provide guidance on application of its electronic
delivery rules to the new participant disclosure rule in advance of the effective date of the rule. Finally, the
DOL clarified that the new disclosures required under ERISA § 404(c), which was amended to be
consistent with the new participant disclosure rules, do not need to be provided before the date that the
initial participant-level disclosure is required to be provided (or by May 31, 2012 in a calendar year plan).
By Robert C. Lawton
August 1, 2011
Simply stated, offering employees retirement education is the right thing to do. Retirement plans are complex and not easily understood by the average employee. More employees would participate in corporate retirement plans if they understood them better. If you are offering a 401(k) plan to your employees, but not sharing the value of the plan or how to use it properly, you aren't really committing to a solid retirement program.
Further, as a plan sponsor, it may be a wise fiduciary decision for you to provide education sessions. If you follow the guidelines for complying with section 404(c), you can obtain protection from certain participant lawsuits. However, in order to gain this protection, you need to share plan information with participants. Employee education sessions help you document the information-sharing process.
From my experience giving employee presentations for over 25 years, I have learned that the most successful employee education programs have eight common characteristics. These top-of-the-line programs are:
1. Topically timely. A common discussion topic right now is participant re-commitment to properly contributing and allocating assets. Many plan participants have yet to resume contributing (they stopped during the market meltdown) or re-commit to riskier assets, like equities. These are some of the issues of the day.
2. Easily understandable. It's probably not necessary to review the Sharpe ratios of the investment funds in your plan. However, talking about basic diversification and risk tolerance is very important. There are a number of fun-to-take quizzes available to help participants gauge their risk tolerance. It is well worth the time to administer the quiz.
3. Full of facts. Did you know that, according to a 2009 Alliance Bernstein study, 401(k) plan participants need to average 13.5% in contributions in order to retire without reducing their standard of living? Using fact-based employee education opens the eyes of participants and makes your sessions more relevant.
4. Culturally appropriate. Your company has a unique culture. Whether you're an engineering firm or a manufacturer, the employee education sessions you present need to be appropriate for your culture. Resist off-the-shelf solutions many vendors will offer. Instead, work with someone committed to crafting a session that is suitable for your company.
5. Supported by and supports your other communication programs. A consistent, on-message annual employee education effort is worth much more than you will pay to design it, in employee retention and appreciation alone. A message that is supported by your other communication efforts is better understood and accepted by employees.
6. Fun! Remember, we're trying to educate adults here. We aren't going to lose your employees (generally) to discussions with their neighbors. Instead, if not properly engaged, they will power down, turn off and worst of all, possibly fall asleep! To have meaningful employee education sessions, employees have to be engaged to a high degree. Effective education sessions often feature employees talking more than presenters. These are not easy sessions to design or present. However, if your company is offering them, you'll know they're successful based on the feedback that you get.
7. Short. Hour-long training sessions where a presenter grinds through 60 or so slides are not appropriate. Twenty or 30 minutes is a good rule of thumb. Even heavily engaged employees tire of training within half an hour.
8. Handout-rich. Your employee may or may not be the financial decision-maker in the family. If it's possible for you to invite spouses and significant others to your sessions, do it. But more than likely, that won't be the case. So you need to make sure that your employee has enough hardcopy information from the session to share it with his/her significant other.
The Department of Labor has been much more interested lately in your efforts at sharing plan information with your plan participants. Annual employee education sessions help you share this information in a way that is easily documented. Sessions can be scheduled over the lunch hour (ask presenters to bring in pizza) or in conjunction with a benefits fair or open enrollment program. Kickstart a new round of employee education sessions for your plan participants today.
Given the current economic climate, a greater number of participants may be requesting hardship distributions from their retirement plans. To avoid jeopardizing the qualified status of the plan, employers and plan administrators must follow both the plan document and legal requirements before making hardship distributions.
Some retirement plans, such as 401(k) and 403(b) plans, may allow participants to withdraw from their retirement accounts because of a financial hardship, but these withdrawals must follow IRS guidelines. A plan may only make a hardship distribution:
- If permitted by the plan;
- Because of an immediate and heavy financial need of the employee and, in certain cases, of the employee's spouse, dependent or beneficiary; and
- In an amount necessary to meet the financial need.
Before making hardship distributions:
- Review the terms of the plan, including:
- whether the plan allows hardship distributions;
- the procedures the employee must follow to request a hardship distribution;
- the plan's definition of a hardship; and
- any limits on the amount and type of funds that can be distributed for a hardship from an employee's accounts.
- Obtain a statement or verification of the employee's hardship as required by the plan's terms.
- Determine that the exact nature of the employee's hardship qualifies for a distribution under the plan's definition of a hardship.
- Document, as may be required by the plan, that the employee has exhausted any loans or distributions, other than hardship distributions, that are available from the plan or any other plan of the employer in which the employee participates.
If the plan's terms state that a hardship distribution is not considered necessary if the employee has other resources available, such as spousal and minor children's assets, document the employee's lack of other resources.
Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee's financial need. However, amounts necessary to pay any taxes or penalties because of the hardship distribution may be included.
Ensure that the amount of the hardship distribution does not exceed any limits under the plan and consists only of eligible amounts. For example, a plan could limit hardship distributions to a specific dollar amount and require that they be made only from salary reduction contributions.
If the plan's terms require that the employee is suspended from contributing to the plan and all other employer plans for at least 6 months after receiving a hardship distribution, inform the employee and enforce this provision.
If a plan does not properly make hardship distributions, it may be able to correct this mistake through the Employee Plans Compliance Resolution System (EPCRS).
IRS.gov / Retirement Plans Community / Retirement Topics / Hardship Distributions / Do's and Don'ts of Hardship Distributions