New rules highlight 401(k) education lapses

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Education is the foundation of all successful endeavours. When plan participants understand the what and the why they will save more and remain disciplined to a strategy. Plan participants do not have to know everything about investing, they just need to know the right things.

Maintaining effective plans with a strong education component isn’t just the right thing to do; it’s the foundation of a retirement plan that complies with federal rules. If plans are not delivering participant-driven education programs, they’re not equipping their participants to make informed decisions about their investments. Therefore, these plans are not compliant with federal rules and thus, they set up sponsorsfor potential lawsuits.This summer, when service providers supply plan sponsors with the required list of services they’re providing for their current compensation, companies should take note of whether education programs are included in their services. In many cases, they won’t be.

This shortcoming, along with various others showing how little many plans are receiving for the fees they’re paying, will prompt many sponsors to seek more reasonable fees. The best way to do this is to:

  • Issue a request for proposal (RFP).
  • Compare the scope of services to those offered by other providers for the fees being charged, with emphasis on individual employee assessment and education.

If effective, deeper financial education can empower employees to assess the required basic disclosures through the lens of fundamental financial knowledge. Only then can 401(k) plans ultimately achieve their true purpose: to assure retirement security.

Without proper education and coaching your company sponsored retirement plan adds little or no value to your employee benefit package.

Please comment or call to discuss how this affects your company benefit package.

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American Workers Seek More Security in Retirement and Health Plans

With the decline in pension plans expected to continue. Companies that seek to remain competitive for talented employees must provide excellent employee benefits. This includes a 401(k) plan that looks more like a pension plan but without all the risk for the employer. MOst plan participnats realize that they cannot beat the market. These employees are looking for guidance from their employers. Those employers providing the proper guidance will be rewarded with talented and loyal employees.

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Retirement security has become more important to many employees

The economic and financial crises over the last three years unveiled a retirement savings crisis long in the making. While Social Security’s shortfalls are a perennial worry, recent steep declines in 401(k) accounts — in some cases combined with inadequate savings over a longer period — and falling housing prices have forced many workers to shelve their dreams of a comfortable retirement, at least temporarily.

Since the economic crisis, nearly two-thirds of survey respondents have been paying closer attention to their retirement readiness. This is particularly true of older workers, DB plan participants and higher-income workers. Over the last three years, retirement security has taken on greater priority for nearly nine in 10 older workers

Business owners/managers will need to focus more on the quality of the retirement plan they offer to employees to attract and retain talented people. A great way to address this is to hire an independent fiduciary to a manage their company retirement plan. This will improve results and reduce anxiety.

Please comment or call to discuss how this affects you and your company.

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BofA to Freeze Pension Fund

As more and more companies from a pension plan to a 401(k) plan exclusively the quality in a 401(k) must be improved. The current model of the 401(k) is that of a supplement to a pension plan. This must change to ensure Americans will be able to successfully retire. Most business owners are far too busy running their comapny with little time to manage a retirement plan for employees and themselves. This is why most should hire a professional fiduciary.

According to news reports, employees will keep the pension benefits they have earned to date; however, workers will no longer accumulate new benefits into the fund.The company is moving to a 401(k) retirement plan for most of its employees. The company currently matches contributions of eligible workers up to 5% in the 401(k) plan; however, starting on July 1, the company will start contributing funds into workers’ 401(k) plans, regardless of whether they contribute to the plan. The company will contribute 2% to 3% of a worker’s salary into the 401(k) plan.

This is additional evidence that the 401(k) plan is no longer a supplement to a pension plan but rather the sole source of retirement for most Americans.

Please comment or call to discuss how this will affect you and your company retirement plan.

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Why Variable Annuities Have No Place in Your 401(k) Plan

Variable annuities are another way for insurance companies to hide unnecessary fees from plan participants. Many of the features when viewed over the long term are unnecessary and hurt performance. The complexity in these annuities does nothing but confuse plan participants and are might to feed their fear. In other words they help sell more insurance.

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Annuities can make sense for a part of your portfolio especially as you reach retirement and you are looking for some stability to your income stream, but not in your 401(k).  The costs and issues in managing a 401(k) plan in your employees’ best interest far outweigh the need for providing annuities in any company’s retirement plan.

When you consider all the fees involved in any annuity the benefit to the investor is very small and in most cases will result in a smaller account balance. Annuities are sold based on the fear of the client. Agents and brokers make money on commissions and will sell whatever the client wants at the time. An real investment adviser is not merely a salesperson. Sometimes being in the correct investments is uncomfortable but is the best for the client.

Please comment or call to discuss how this affects you and your company.

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Plan Design Enhancements Can Confuse Instead of Engage Employees

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Cover of The Paradox of Choice: Why More Is Less

In my opinion the most notable and benefical design is the managed accounts for employees. This allows the plan sponsor to automatically invest employees in a risk adjusted globally diversified portfolio, based on their age. The employee can then, if they desire, opt out of the managed portfolio and choose their own fund mix. I believe most employees will remain in the managed account and will improve results.

The efforts you are putting into improving your plan may be bumping into three major obstacles: skepticism of financial institutions, the diminishing return of too many choices, and a discomfort with change, especially if you have had to make changes that weren’t positive such as passing health care cost increases on to employees or delaying raises. Here are some things to consider:

  1. Put a limit on the number of changes you make per year, along with guidelines for when changes are made. Fads come and go, and not all innovation is for the best. Many companies have a bias towards staying ahead of the curve, which is good in principle, but can get messy in practice because early adopters often make more mistakes that can end up being costly. Sometimes it’s best to wait a little while, watch the results other companies have gotten, and then take that knowledge to roll the innovation out more effectively. This strategy also has a very important benefit for employees: it gives them time to absorb the changes you do make so that they don’t become confused or overwhelmed. It also gives them confidence to know that you have a process in place to thoroughly research all new changes so that they don’t begin to distrust your motives for making change.

Adding additional options doesn’t necessarily provide results. Barry Schwartz, the author of The Paradox of Choice, talks about how our western culture is deeply embedded in the notion that having more freedom-by way of having more choices-is the best way to “maximize welfare,” but more choice actually creates confusion, and employees may end up delaying decisions or avoiding them all together. This has a direct impact on 401k plans, namely that more investment choices have been found to actually decrease participation-the opposite of what employers are looking for. A research study by Sheena Iyengar, Wei Jiang, and Gur Huberman, in partnership with Vanguard Investments, found that for every 10 investment choices offered to employees, plan participation went down about 2%. In effect, employees may be simply throwing their hands up when provided with too many choices.

Too many changes in your plan will confuse and perhaps frighten your employees. However, changes are necessary to improve the results of your company retirement plan. The reason for the plan is to provide your employees with the proper tools to retire.

PLease comment or call to discuss how this affects you and your company.

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Three 401(k) Reforms That Can Help Save America’s Retirement

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The most efficient way to improve the retirement situation in America is to provide incentives to business owners. The more the governement is involved the less efficient this and any other system will be.

1. Double the Incentives That Help Small Businesses Get a 401(k) StartedUncle Sam currently offers a solid incentive for business owners with less than 100 employees to start a 401(k) plan.  However, to create a splash in awareness and encourage more small businesses to move forward with a 401(k), the federal government can do more.

Currently, the IRS provides an annual $0.50 per dollar tax credit up to $500 per year during the first three years of a new 401(k) plan to help offset the setup and administrative costs; the value of this credit over three years equals up to $1,500.  A company with 25 or less employees can reasonably expect to pay between $1,000 to $2,000 a year in administrative fees.  Other related expenses such as matching contributions are also tax deductible for the business.

To create a step change in helping businesses start a plan, the government would be wise to double the incentive by providing a dollar for dollar credit for up to $1,000 for the first three years but only if the company starts a plan by 2013. After that, the credit would expire back to its previous lower level.  Deadlines like this help create serious consideration of employers without a plan.  This could be communicated by the IRS via the news media and directly in their regular tax communications with employers. And while not every small business would jump at the opportunity, it could create significant movement for those who have put it off and have always wanted to provide the benefit for their employee (and themselves).

These type of incentives will help small businesses establish and commit to a company sponsored retirement plan. In order to prevent the federal government from nationalizing the retirement system, small businesses need to take on this awesome responsibility.

Please comment or call to discuss how this affects your company.

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Retirement-plan managers push for simplicity

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Providing pension like retirement plan will imrove results and reduce anxiety for you and your employees. The financial services industry has made the 401(k) plan far too complex with poor results.

In the June issue of Smart Businessmagazine, in an article headlined “Easy does it,” Findley Davies Inc., a Toledo-based consulting firm, reminded employers that they have a moral and legal obligation to help their employees retire with financial security.“Unless plan sponsors embrace their responsibilities and take action, they’re going to be bombarded by tough questions from their participants, particularly with respect to the new fee-disclosure regulations coming out soon,” said Kyle Pifher, a principal in Findley Davies and head of the firm’s recently opened Columbus office.

Providing risk adjusted managed accounts to employees and then allowing them to opt out and choose their own mix will improved results. Most employees will remain in the managed account and will see long term performance improve.

Please comment or call to discuss how this would help you and your employees.

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Your employer’s stock: How much is too much?

The risk of employees owning company stock in their retirement plan is transferred to the business owner/manager. There are numerous casess where the employees were awarded damages in the event of company stock litigation.

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One growing concern among plan sponsors is the growing threat of litigation against companies with heavy concentrations of their own stock in retirement plans. So-called “stock drop” suits were filed against 211 companies from 1997 through 2010, according to Cornerstone Research, which tracks the litigation.

“A sure-fire way to get sued for ERISA violations is to have a big chunk of your plan in company stock, and then have the share price fall 25 percent,” says Ryan Alfred, Brightscope’s co-founder and president. “All of these companies [on Brightscope’s top ten list] will get sued when their stock falls.”

The plaintiffs don’t always win, of course, but Cornerstone reports that 99 of the cases it tracks have been settled, with the mean settlement amount of $20.8 million.


“If more than 20 percent of your account is in company stock, it’s likely to be too high,” says Marina Edwards, a senior retirement consultant at Towers Watson. Wohlner is more conservative, advising retirement savers to limit holdings in their employers’ shares to five to ten percent.

Your company stock may appear safer than the market in general until it’s not. This ‘all in’ strategy can make you rich or poor. When things go bad in a company you may not learn about it until it’s too late.

Please comment or call to discuss how this affects you and your plan.

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Are your employees “retirement ready”?

An increasing amount of people are beginning to realize that they are responsible for their own financial future. Many are looking to their employer for guidance and the right tools. Are you fulfilling this need?

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When employers create an environment which promotes retirementreadiness, they can reduce the costs associated with an aging employee population and deliver a positive message to employees about planning for retirement.  While the responsibility to prepare for retirement will still largely rest with employees, employers now have a way to more accurately guide and prepare their employees to enter retirement at or near their normal retirement age.To develop a “retirement ready” workforce, employers should focus on the following steps:

1. Conduct a Company Retirement Readiness Assessment
When you have an understanding of how different segments of your population are utilizing (or not utilizing) your retirement plan and what their projected outcomes are, it is easier to strategically develop a plan to help improve the retirement readiness of your workforce.

2. Evaluate Plan Design
There are several opportunities within your plan design to help start and keep your employees on the right track towards retirement.  The key is understanding your workforce and then making decisions which support both employee retirement readiness and your corporate goals.

3. Develop Targeted Employee Communication Focused on Changing Behaviors
Employees want to be guided.  Their retirement readiness can be greatly improved when you communicate in a way they can understand and relate to which will allow them to easily and painlessly arrive at the right decisions.

Your employees look to you for guidance in many areas, including financial readiness for retirement. With the proper advice your company retirement plan can become a true employee benefit.

Please comment or call to discuss how this can affect the productivity of your company.

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How 401(k) Profit Sharing Helps Small-Business Owners Maximize Their Savings

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Plan design is critical to the success of a small business retirement plan. For a small business to attract and retain talented employees they should offer an attractive benefit package, this includes a retirement plan. These designs can allow business owners and their top employees to maximize their contributions.

Advanced Profit Sharing Enables Even More ControlWhile a standard profit sharing model is the most commonly used in a 401(k), advanced profit sharing is the preferred plan design for businesses with consistently strong profits and fewer than fifty employees. This profit sharing design enables employers to profit share different salary percentages based on unique employee groups within a company.

For example, a legal firm typically has partners, attorneys, as well as support staff that make up the practice.  Each group is distinct, has differing compensation levels and is essential to the firm’s success.  A different percent of salary can be provided as a profit share for each defined group to reward employees based on the group’s role, compensation or age.  A new comparability analysis is done by the company’s 401(k) provider or advisor to determine the optimal levels that best meet the business’ compensation objectives. This can be great for the employees and a smart way for the firm to better manage the rewards of sharing profits too.

If you already have a 401(k) plan and think this can benefit your company, talk to your provider about how you can best use the profit sharing feature to meet your business goals.  If you’re thinking of starting a 401(k) plan for 2011, you can typically purchase a plan until mid-December and you will have until near your tax deadline to make any profit sharing contributions for 2011.

This is one example of how small business owners can maximize their contributions while providing a meaningful benefit to their employees. Each owners situation is different, requiring an individual analysis.

Please comment or call to discuss how this affects you and your business.

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