Tag Archives: understanding retirement

Retire Without the Worry

More than half (54%) of near-retirees say they’re concerned about having enough money to last through retirement. Forty-five percent say they’ll need to work at some point during retirement.* But this doesn’t have to be your retirement story. Following these tips may give you a better retirement outlook.

Be flexible

Retirement10Retiring before you’re financially or psychologically ready can put a damper on your retirement. From a financial standpoint, if you retire too soon, you risk running out of money. Periodically review your retirement investments with your financial professional to see if you’re on track for your desired retirement date. If not, you may have to work a year or two longer, which could make a surprising difference in retirement readiness. Or, if you’re able to, increase contributions to your retirement account by enough now to meet your desired retirement date.

If you haven’t thought about what you’re going to do with your time, you may be at loose ends when you retire. Explore paying and nonpaying options for keeping active before you retire. The Employee Benefit Research Institute found that many retirement-aged people have nonfinancial reasons for continuing to work full- or part-time.**

Have multiple resources

It’s good to have a fixed income source, such as Social Security benefits and/or an employer sponsored pension plan, to help cover basic expenses and variable income sources, such as a 401(k) account, an individual retirement account (IRA) and personal investments. Because these accounts have the potential to increase in value, they may help cushion inflationary price increases. You can use the funds to help cover unexpected expenses and/or pay for retirement living expenses.

Be realistic about retirement expenses

Your expenses may or may not decrease at retirement, depending on the activities you intend to pursue. Ask your financial professional to help you realistically project your future retirement expenses based on your individual needs and wants so you can judge if you’re financially ready to retire.

* Maritz Research Retirement Study, 2013, surveying individuals with less than $500,000 in retirement resources

** ebri.org Issue Brief, March 2013, No. 384

Life Lessons: Countdown to Retirement

If retirement is close at hand, you’re probably ready to start relaxing after years of working hard. However, there are still a few more details to take care of to make sure you’re well prepared for your future. Here are a few suggestions to help you count down to retirement.

early_retirementReview Your Asset Allocation

Look closely at your portfolio’s asset allocation. As you near retirement, you may want to reduce your exposure to more volatile investments, such as stocks. However, consider keeping some of your retirement dollars allocated to stock funds or portfolios. Since your retirement could last a long time, you may want some investments that have the potential to produce inflation-beating returns.

Consider Distribution Options

Well before your retirement date, consider your plan distribution options. Keep in mind that if you take a lump-sum payment, you’ll owe income taxes in the year you receive the distribution.* That will leave you with less money to spend and reinvest during retirement.

Instead, you may choose to roll over the distribution into an individual retirement account (IRA) to defer taxation. Or you may be able to keep your money in your existing plan account. Either way, withdrawing the money over time would spread out your tax liability. If you decide to roll a plan distribution into an IRA, consider having your money directly transferred by your plan to the IRA to avoid federal income-tax withholding.

Keep Contributing to Your Plan

Use the time between now and retirement to add to your retirement savings. If you’re age 50 or over, your employer’s plan may allow you to make extra “catch-up” contributions. If this opportunity is available to you, taking advantage of it may help you accumulate more money for your retirement.

* Qualified Roth distributions are not subject to federal income taxes.

Deadline Looming: New Retirement Plan Fee Rules

For years, there have been concerns about the murkiness of various fees charged to retirement plans by their vendors — and thus, the challenge for employers and employees is to make sure they know what they’re paying. High fees can be a huge drag on long-term investment performance and the ability of employees to retire.

As plan fiduciaries, employers have an obligation to ensure that employees aren’t getting ripped off. More specifically, they need to demonstrate that they:

  • Exercise due diligence in choosing and evaluating their plan vendors on an ongoing basis, and
  • Have a rational foundation for the decisions they make.

Using vendors whose fees are on the high side of the spectrum does not necessarily indicate a failure to exercise fiduciary duty, as long as the fees are deemed “reasonable” for services rendered. For example, paying higher fees for a “Cadillac” service package would, presumably, be entirely reasonable if you made a conscious decision that type of plan is what your employees need and want.

The new regulations with the July 1 compliance deadline are called the “plan level” disclosure rules (also called 408(b)(2) rules). After years of fits and starts, the final version of those rules was published by the Department of Labor (DOL) in February. Plan vendors have been gearing up to comply with the rules at least since 2010 when an “interim final” version was issued. Indeed, many employers have already received disclosures from vendors who decided not to wait to the last minute. Those employers should be reading the disclosures carefully, and preparing to answer questions from employees once employees receive their disclosures.

Clear as Mud

The biggest area of murkiness in plan fees up until now has been revenue-sharing and “indirect compensation” arrangements between investment managers and other service providers. Thus the purpose of the new rules, according to the DOL, is to give plan fiduciaries enough information to spot (and evaluate the implications of) any such conflicts. The disclosures should also enable plans to “assess the reasonableness of total compensation, both direct and indirect, received by the covered service provider, its affiliates and/or subcontractors.” (The DOL’s summary of the 408(b)(2) regulations can be found here.)

Note of caution: Employers cannot simply assume their vendors are providing them with all the information they need to carry out their fiduciary duties. This is important because employers that fail to obtain the information from the required disclosures could be deemed as parties to a “prohibited transaction,” and subject to penalties and potential accusations of a fiduciary breach.

For these reasons, it is critically important that employers, either on their own or with the help of appropriate advisers, take affirmative steps to ensure they are making prudent plan vendor decisions based on all the facts. When it comes to evaluating the cost of plan services, employers and their advisers may want to take advantage of fee benchmarking services that are readily available.

Second Deadline: August 30th

Regarding the DOL’s “participant-level” fee disclosure rules, also known as the 404(a)(5) regulations, employees will begin receiving regular rundowns on what they are paying — although the detail won’t be as exhaustive as what is required for the “plan level” disclosures.

As described in a recent report by Dalbar, a financial industry research organization, employees soon will “see how much they paid in fees and expenses… and this amount is not some complex formula or even a percentage but as dollars and cents that can be compared to their mortgage, rent, car payments or what they spend on vacation.” That information may arrive accompanied by their quarterly 401(k) investment statements.

The added clarity is good, but even employers that have addressed all of the fiduciary implications of the plan-level disclosures must be prepared to answer any employee questions that arise as a result of the new fee information they will soon receive.