Retirement Income Blog

The largest retirement plan providers n the US are Fidelity, Vanguard and Schwab.  These companies offerings are quite similar in that that all provide competitive investment performance, reasonable fees (Vanguard being the least expensive) and high quality products — which can all have a major impact on the amount of money you’re able to build during your working years.

Features you want in a retirement plan provider:

Broad investment choice. Make sure the company offers a wide range of investment options. For example, look for a firm that has account or fund offerings in different asset classes, such as stocks, bonds, guaranteed, money market and real estate. Diversifying your retirement dollars among at least three asset classes can reduce overall volatility. All mutual fund companies will offer a broad array of fund choices.

Solid investment performance track record.

Different fund families have different strengths.  Vanguard’s strength is keeping costs low.  Fielditiy’s strength is strong equity performance.  So you may want to look for a retirement plan provider that has strength in the aspect most important to you

Low fees.  

Over a 20-year period, a 1% fee differential can have an almost 30% difference in the annual income from a

long-term fund investment. You can read the fund’s prospectus to get full disclosure of fees and get a comparison by checking Morningstar, and independent fund rating service.

Frequent Reporting
There are still some companies that send a statement just annually.  If that’s sufficient for you, great.  But if you would like more frequent reporting of your plan, then ask about that in advance.

Web based or phone based service
If you want to make investment changes frequently, you want to choose a retirement plan provider that has a robust web based front end so that you can fully mange your retirement account on the web.  Having to rely on the phone can mean long waits on hold.  Some retirement plan providers that are not yet up to speed still require changes and administration using the mail.  Those that have fully embraced the web will have web-based tools such as retirement plan calculators, a retirement income calculator, Roth IRA conversion calculators and other useful tools.

Personal Assistance
If you feel you need personal investment advice from your retirement plan provider, you may want to choose a provider that has an office in your town.  That way, you can sit and talk with an advisor, attend seminars periodically held by the retirement plan provider and have a local relationship.

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Typically, when you see the phrase ”retirement plan services,”, these are services developed for companies in helping their employees save for retirement. These services may include several as follows.

Retirement Plan Design
Management of many companies don’t know if it’s better to have a 401k, a profit sharing, a defined contributions plan and how to design the plan.  Management may be faced with such options as whether the retirement plan should have a vesting schedule, which employees should be included (i.e. based on age or hours worked), should there be a loan feature, etc. Retirement consultants experienced in providing retirement plan services will ask for a census of the employee population and based on age, longevity of employment, distribution of salaries, and management’s objectives for having a retirement plan, will design the right plan.

Retirement Plan Administration
Administration includes maintaining records for each employee’s account, preparing tax filings, holding enrollment meeting to explain the retirement plan features to employees, maintaining a staff to answer employee questions, and making changes to the plan design in reaction to changes in the tax code.  The rule of thumb is that this retirement plan service costs $25 per employee per year.

Distribution Processing
As employees retire or leave the company, distributions must be made in accordance with IRS rules.  An experienced provider or retirement plan services have systems established for efficiently helping these employees complete a IRA rollover or explain other retirement options.

ACP/ADP and Cross Testing
The Department Of Labor requires that retirement plans not discriminate in favor of highly paid employees.  Therefore, plans need to pass several tests to show that there is a uniform participation in the plan.  In such cases were the plan becomes biased in favor of the highly compensated, the company may be required to make contributions into the accounts of those with lower pay or the higher paid people may be barred from contributing to the plan (in case of a 401).  This type of compliance monitoring is a critical item on any menu of retirement plan services.

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Company retirement plans come in two flavors–defined benefit (based on an ultimate benefit to be paid upon retirement) and defined contribution (based on the amount that gets put into the plan today).  These are both referred to a “qualified plans” because they qualify for tax deductible contributions under section 401 of the Internal Revenue Code.

No matter what type of plan pertains to you, at least 10 years prior to retirement, make an estimate of the income you need using the retirement planning calculator and determine what portion of your retirement needs the company retirement plan will provide.

In a defined benefit plan, the benefit is spelled out such as a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk.  For example, upon retirement, the employee receives from the company retirement plan 2% of their final year’s salary times the number of years with the company.  So if they had 20 years tenure, they would retire with a benefit equal to 40% (2% x 20) of their final year’s salary. The employee, the employer, or both may make contributions.

Defined contribution plans are more common in the US and allow the employer and/or employee to make contributions, so that the final benefits depend on how much was in the account and the rate earned by the account’s investments. An individual accounting must be set up for each participant in the plan although the funds can be one large pool. The federal government does not guarantee a participant’s pension benefits; instead, the plan is “participant-directed”, meaning that the employee makes the investment decisions based on the employer’s options. Contributions have a limit of $46,000 for 2008 or 25% of the participant’s total compensation. The different defined contribution company retirement plans are:

Profit sharing plan–they have nothing to do with sharing of profit so don’t get excited.  They should be called “discretionary plans” because management makes a discretionary decision how much to put into the plan each year.  Once the amount to be contributed to the company retirement plan is decided, the formula to allocate amongst employees may be very simple, such as a percentage of salary.  An employer alone makes contributions based on an employee’s current-year compensation.  If the employer also wants the employee to have the opiton to contribute, this is now a 401k plan.

Stock bonus plan: A type of profit sharing plan, where contributions are made in the form of company stock.

Money purchase pension plan: a company retirement plan with fixed-percentage compensation by the employers. Unlike profit sharing plans, these contributions are mandatory every year, regardless of profits or other factors.  Such a plan may simply be an annual contribution by the company such as 3% of pay.

In all cases, the government allows the employer to exclude from the company retirement plan part time employees (those working less then 1000 hours annually).  Additionally, those under age 21 can be excluded.  Even after attaining 2 years of full time work, the plan can have only vested benefits.  This means that whatever amount has been placed into the company retirement plan, it may not be fully vested to the employee until after 6 years.  For example, if the employee leaves the company after 2 years, he would get 20% of what the company had contributed for him and leave the rest behind (the forfeited amount gets allocated to the remaining employees in the plan).

Employers may also have company retirement plans that are different than the above or discriminate in favor of highly compensated employees or management.  These non-qualified retirement plans do not meet the IRC or ERISA requirements. These plans are funded by employers and are more flexible but they do not have the tax benefits qualified plans do. Benefits are paid at the retirement age in the form of annuities, which are taxed as ordinary income tax, or in lump sum payments, which cannot be rolled over into IRAs.  One can use the fixed annuity calculator to determine if the amount paid by the company will be better or if a lump sum should be taken for purchase of an individual annuity contract.

Post provided by Javelin Marketing

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Here’s how to understand defined benefit plans.  IRS allows, up to limits, the amount a business owner can contribute to a plan so that at retirement, he will have enough in his plan to generate an annual income equal to the income they had while working. The annual limit for this type of self employed retirement plan  in2008 is $185,000. Because older business owners have less time to build up their plan balance, they can contribute more than younger business owners to reach a particular dollar goal. However, a special type of defined benefit plan, the 412i plan allows contribution that are much larger.

The most powerful plan for maximizing tax deductions for the self employed is a 412i retirement plan.  This type of self employed retirement plan may not be a good idea if you have employees. A 412i plan allows you, the self employed individual to generate large tax deductible contributions, enjoy steady, tax-free earnings, while minimizing the amount of contributions that must be allocated to the employees if you have employees. 

A 412i self employed retirement plan must be  funded with life insurance and annuity contracts—i.e. you cannot invest in mutual funds, stocks, etc.  Section 412i allows current contributions to be calculated using the guaranteed cash values and annuity purchase rates of life insurance products. This means that the amounts that a business owner can contribute and deduct are far larger than with other types of self employed retirement plans.

Following is a sample of the maximum deductions available for a 55 year old business owner under different qualified plans:

Comparison of Qualified Plans
Plan Type               Owner’s Maximum Deduction
 
Profit Sharing                               46,000
Money Purchase                           46,000
Comparability                              46,000
Traditional Defined Benefit Plan 145,201
412(i) Plan                                  339,857
Source: 412i plans inc.
 
Once started, the annual contributions to this type of self employed retirement plan are mandatory.  Therefore, the business owner should have a stable cash flow or other source of funds.  The 412(i) plan may not be the ideal plan for all situations and businesses. It works best when there are very few employees (less than five); and where the owner is fifty years old or within 10 years of retirement and is older than any of the firm’s employees (the amount of tax deductible contribution is limited by the owner’s age, the older the owner, the larger the contribution) .
The major disadvantage in this type of self employed retirement plan is the lack of flexibility in investments. The plan must be funded exclusively through insurance contracts in order for all benefits to be guaranteed.  On the other hand, this may be attractive if the plan owner also has estate planning requirements for life insurance.

Unlike the plan vanilla defined benefit plan, which require an actuarial calculation annually and are thus more expensive to maintain, a 412(i) self employed retirement plan needs no actuarial certification, as only enough money to provide the guaranteed benefits can be paid to the plan. There can be no over-funding or under-funding problems.

You cannot get this type of plan at a bank or brokerage firm (typically).  This type of self employed retirement plan is designed and supplied by an insurance professional or a knowledgeable retirement advisor as part of your retirement income planning and estate planning.

Post provided by Javelin Marketing

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If you don’t plan where you’re going, you’ll probably get there.  To have the comfortable retirement you desire, you need to plan ahead.  In 60 minutes using this retirement planning checklist, you can lay the groundwork for the retirement you desire.

How do you want your retirement to look?

What is your average day?  Where do you live? Do you work and if so, at what? Do you volunteer? Where? Do you see family members, friends, how often.   Do you take vacations?  How often and to which places.  Develop a clear picture of what you want your retired life to be.  This retirement planning checklist will be of greatest value if you take the most time on this step—actually defining what you want and putting it on paper.

Calculate expenses

This is most easily done with an Excel spreadsheet

Given the picture you created above of your retirement, list all of your expenses—everything from food to rent to vacations to health care , long term care insurance (use the long term care calculators to get cost) and total for the year.  Now you know how much you need.  On to the next step of our retirement planning checklist.
Take stock of retirement income sources

Of the expenses you calculated above, what income will you have in retirement?  Go to the social security web site ssa.gov to get the estimate of your social security benefits.  Will you have pension or other income or income from work?  Also, from your investment assets, be conservative and assume you will withdraw 4% annually.  For example, if you have a retirement nest egg—retirement accounts such as IRA, 401k and other investments of $500,000, assume you will withdraw $20,000 annually.  This seemingly conservative assumption will insure that the pot lasts through your lifetime.  Now you have the total income you have in place to offset the expenses above.  Subtract the two.  If you have a deficiency in income, that’s okay for now.  We address that in the next section of our retirement planning checklist.

Fix the Gap between income and expenses

If you have time until retirement, you can fix the gap by saving more and reducing your current expenses.  If you’re close to retirement, then you can save more by working longer or you can close the gap by reducing retirement expenses (e.g. living in a less costly area, reducing annual vacations from three to one.  Or you can work part time in retirement.  You do have choices.

Make a time line

Put it on paper.  By when will you have saved your targeted amount, what is your retirement date.  When will you starting your search for part time work.  If moving, when do you put your house up for sale?  All of the items listed in your retirement picture in step 1of the retirement planning checklist list by date to start and complete.

At this point, don’t obsess about smaller issues that you can address once retired like tax and estate planning, selecting specific vacation destinations (unless you know them now), the investment choices for your portfolio.  These can follow in the first few weeks after retirement.

 Learn more, have a more comfortable retirement.
Get your Retirement Financial Guide.

This post provided by Javelin Marketing

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Selecting the right retirement financial planner is important to you.
Here are questions to ask a retirement financial planner candidate that will help distinguish one from the other.

1. What experience do you have with retirement financial planning?
Find out the percentage of his clients by age category.  You want to make sure that the bulk of his clients are similar to you so that he has experience in actual planning for people like you.

2. What are your credentials and what do they mean?

There are retirement financial planners with great credentials that are not that competent and vice versa.  But credentials do illustrate an individual’s willingness to engage in further learning and take on additional work.  Find out what work was required to earn each credential as there are some credentials in the financial services industry that have little value.

3. What services do you offer?
Likely, you need assistance with retirement income planning, tax reduction, budgeting, possibly estate planning and portfolio management.  If his list of services does not match your needs, then move on to another retirement financial planner candidate.

4. What is your approach to retirement financial planning?
When you ask this question, you look for a thoughtful systematic approach.  It might sound like this:

1. First, we estimate the income you will need in retirement based on your desires.
2. Next, we calculate the sufficiency of your current financial resources to achieve that income.
3. If the resources are insufficient, then I present you with alternatives to fix the deficiency as best we can.
4. Next, we document a spending plan, a retirement planthat takes into account which pots of money get used first, tax minimization and a portfolio design.
5. Then we implement what you agree on.
6. Last, we meet every 6 months to review progress and account for any changes in your desires or circumstances.

If the retirement financial planner cannot easily state their approach in a concise and chronological manner, find a professional that will.

5. How can I tell that you’re competent?
Don’t be afraid to ask this challenging and direct question to a prospective retirement financial planner.  If he cannot give you an answer that inspires confidence, then why trust him with your financial future?

6. How will I pay for your retirement financial planning services?
As part of your financial planning agreement, the financial planner should clearly tell you in writing how she will be paid for the services to be provided.

Retirement Financial Planners can be paid as follows:

• Fees based on an hourly rate, a flat rate, or on a percentage of your assets
• Commissions paid by a third party from the products sold to you to carry out the financial planning recommendations.
• Commissions are usually a percentage of the amount you invest in a product.
• A combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommendations and commissions are received from any products sold.

In addition, some planners may offset some portion of the fees you pay if they receive commissions for carrying out their recommendations. You would prefer to deal with a professional that works on a fee basis rather than commissions that may be “buried” or hidden in products.

7. I have assets of  $xxxxxx.  How much do you typically charge someone like myself and what are the components of those charges?
This question gives clarity to the answer from question 6.

8. Will my retirement financial plan look like those for your other clients?
If the planner tells you everything is totally customized, be ready to pay a fortune or the planner is not being honest.  If most of the retirement financial planner’s clients are between age 55 and 65, then the plans SHOULD look similar from one another as people in the same circumstances have similar retirement planning issues.  It’s the similarity among the retirement financial planner’s clients that gives him the experience you desire.
9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?
While you may think this is an important question, there is no reason to ask it as you can get this information on the Internet.  The planner is either responsible to the SEC, FINRA and/or the State Department of Insurance.  All 3 list disciplinary records and in 15 minutes, you can check the background of any potential retirement financial planner.

10. What do I get in writing?
If the retirement financial planner offers little in witing, walk.  At minimim, you should get a list oif fees and services, disclosure of any conflicts of interest, a written plan and an investmemnt policy statement.  While these dont need to be lengthy, a reputable retirement financial planner will provide documents that serve these purposes.

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If you’ve ever been involved in a qualified retirement plan (401k, profit sharing, pension, defined benefit, etc) there has been a retirement plan administrator working behind the scenes.  This firm has insured that the plan was in compliance with all federal rules (e.g. ERISA) and maintained all pertient filings with the government and disclosures to you, the plan participant.

Retirement plan administration is not necesssary with an individual acount such as an IRA, Roth IRA, SEP or individual 401k.  Typicaly, you as the participant have no direct interaction with the retirement plan administration process other than when you join the plan or when you retire and leave the plan.  The type of retirement help you typicallly need (e.g. selecting investments) is not what the retirement plan administrator will do.  Most however do maintainin retirement income calaculators, annuity calculators and other tools on their web sites to help retirement plan participants.

The types of plans that require professional retirement plan administration are:

Profit Sharing Plans - formulas may be integrated, non-integrated, age weighted or cross-tested

Money Purchase Pension Plans (Integrated and Non-integrated)

401(k) Profit Sharing Plans - Profit Sharing formulas may be integrated, non-integrated, age weighted or cross-tested

Safe Harbor 401(k) Plans

Super Comp and 401(k) Plans

One-Person (Solo) 401(k) Plans

Defined Benefit Plans

Cafeteria Plans

Employee Stock Ownership Plans (ESOP)

Typical Services Provided by a Retirement Plan Administrator

Employee Communications
Announcement Information
Participant Election Forms
Investment Direction Forms
Beneficiary Forms
Administration Services Included in Base Fee
Daily, Monthly, Quarterly and Annual Record-keeping
Individually Directed Accounts (single brokerage account offering participants multiple mutual fund choices)
Pooled Accounts (single portfolio)
Separate Accounts (each participant maintains a separate brokerage account)
Financial Statements
Earnings Allocation
Contribution Allocation
Forfeiture Allocation
Summary Annual Reports
Participant Statements
ADP/ACP Testing Quarterly (if applicable)
401(a)(4) and 410(b) Testing Annually (if applicable)
5500 Series Form Filings and Related Attachments

Retirement Plan Administration Administrative Services

Daily internet access to participant accounts and/or Voice Response Unit (VRU) daily access
New Participant Enrollment
Participant Termination (includes all forms prescribed by Department of Labor and/or IRS)
Hardship or Other Withdrawals
Participant Loans (includes loan documents and amortization schedules)
Additional Participant Accounts (such as rollover funds maintained separately)
Refund Calculations
Manual Data Entry (for employee census information)
Trust Accounting (in excess of 8 hours)
1096, 1099-R and 945 Governmental Filings
Plan Documents and Related Forms

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