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New Retirement Thoughts for all Employees
By Rick Kahler CFP® http://www.KahlerFinancial.com
How hard is it to do things we know are good for us – like exercising more – or saving for retirement?
New Year’s Resolutions
This time of year, with broken New Year’s resolutions piling up like snow-banks, it’s clear that the answer is “very hard.” Most of us have good intentions, but we aren’t so good at taking consistent action to turn those intentions into reality.
Retirement Pans
One of the areas where many people don’t do what’s best for them-selves is participating in company retirement plans. If your employer offers a 401(k) or 403(b) plan, it’s ridiculous not to participate in it. For one thing, it’s an easy way to put money away for retirement before you see it—and before you pay taxes on it. Even better, the employer’s matching contributions give an extra boost to your savings that’s almost like found money.
Yet studies have shown that only 67% of eligible employees participate in these plans if they have to choose to sign up. When employees are automatically enrolled in the plans, and have to actively choose to opt out; however, the level of participation increases to 77%.
For this reason, the US government in recent years is encouraging large employers to offer automatic-enrollment retirement plans.
US News Report
Yet a recent article in US News points out a downside to this well-intentioned attempt to save procrastinating non-savers from themselves. Plans with automatic enrollment may have higher participation, but that doesn’t necessarily mean greater benefits for employees.
Why no Better?
When more employees participate in a 401(k) plan, the employer has higher costs in the form of increased matching contributions.
A study last fall by the Center for Retirement Research at Boston College found that companies with automatic enrollment tend to compensate for those higher costs with smaller matches. The average amount—3.2%, compared with 3.5% for plans that don’t have automatic enrollment—may seem insignificant. Yet over time it can make a big difference in the amount of money an employee has available at retirement.
Default Rates
More importantly, the study also found that the default contribution rate (the amount invested out of each paycheck) in some automatic-enrollment plans resulted in employees saving less than had they chosen that amount themselves. The default contribution rates are likely to be less than the rate required to receive the employer’s maximum matching contribution. The default investment options also tend to have underperforming investment choices compared to those chosen independently by participants.
Report Synopsis
One rather obvious conclusion of the study is that automatic enrollment means more retirement savings for employees who otherwise would not have signed up for a 401(k). At the same time, because of the lower employer matches, employees who would have chosen to sign up anyway are likely to end up with less retirement savings than they would have in a non-automatic plan.
Questions
Does this mean automatic-enrollment 401(k) plans are not a good option for retirement saving? Not at all! If you passively participate in an automatic plan and leave your contributions at the default contribution rates and investment choices, you’ll still be better off than if you don’t participate at all.
Research
Yet the research suggests that settling for the employer defaults, a one-size-fits-most option, is probably not your best choice. You can choose instead to educate yourself about the investment choices in a plan, contribute the maximum amount you can, and take full advantage of the employer match. The more you learn about the available options, the better choices you’ll be able to make.
Assessment
Ultimately, no employer or plan manager will ever care more about your investments than you do. The most successful retirement savers are still those who take responsibility for their own future.
Conclusion
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Filed under: Retirement and Benefits | Tagged: 401(k), 403(b), Retirement and Benefits, Rick Kahler CFP® |
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On 401[k]s
It is unfortunate that not all employers offer all employees a 401(k), especially with matching contributions, but that’s just not really feasible.
If you are eligible for a 401(k) through your employer, get involved with it now!
If not, there are other options, like the IRA.
You can learn more at http://www.mutualfundstore.com/individual-retirement-account-ira.
Take care and good luck.
Bob
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Special 403(b) and 457(b) Catch-Up plan rules
403(b) and 457(b) plans can (but aren’t required to) provide their own special catch-up opportunities. The 403(b) special rule, available to participants with at least 15 years of service, may permit an additional $3,000 annual deferral for up to five years (certain additional limits apply). A participant can use this special rule and the age 50 catch-up rule in the same year. Therefore, a participant eligible for both could contribute up to $27,000 to his or her 403(b) plan account (the $18,000 regular deferral limit, plus the $3,000 special catch-up, plus the $6,000 age 50 catch-up).
The 457(b) plan special rule allows participants who have not deferred the maximum amount in prior years to contribute up to twice the normal deferral limit (that is, up to $36,000 in 2016 and 2017) in the three years prior to reaching the plan’s normal retirement age. (However, these additional catch-up contributions can’t exceed the total of the prior years’ unused deferrals.) 457(b) participants who elect to use this special catch-up rule cannot also use the age 50 catch-up rule in the same year.
Source: “Boomer Expectations for Retirement 2016” – Insured Retirement Institute
Michael Green
[RIA]
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