Wonder What IRS Agents Look for When They Audit Retirement Plans?

Large participant loans are a key examination issue.  During an audit, IRS checks how plans handle loans, such as the time they allow for repayment, and what happens upon default.  Agents ask for copies of signed loan agreements and promissory notes, as well as documentation to substantiate residential loans.  Generally, plan loans are tax-free if the total doesn’t exceed the smaller of $50,000 or 50% of the account balance.  Excess loans are treated as taxable distributions.  Among the most common plan loan failures: loans over $50,000; Nonresidential loans in which repayment exceeds five years; and loan defaults, in which the participant fails to make the payment.

Source: The Kiplinger Tax Letter, June 17, 2016

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One of the Best Retirement Deals 9 Out of 10 People Ignore

By Carla Fried

There are some easy decisions around 401(k)s. Contributing enough to trigger the highest possible matching contribution from your employer, for example, is one of them.

Contributing to a Roth 401(k) should be another. But it’s not. Eight years after retirement savings plans were allowed to offer the option, which can help many people boost their retirement funds, more than half added it. Yet just 11 percent of savers with access to the account use it, according to benefits consultant Aon Hewitt.

Roth 401(k)s are much like your garden variety 401(k). The big difference is that you contribute after-tax money, not pre-tax dollars like with the standard 401(k). Later in life when you want to tap that Roth money you won’t pay income tax on it — not a penny, as long as you’ve held the account for five years and are 59 ½.

The conventional wisdom is that the Roth 401(k) makes the most sense if your current income tax rate is lower than what you expect to pay in retirement. Opting for the Roth 401(k) essentially prepays your tax bill. Granted, deciding if the Roth route makes sense for you is tougher than deciding whether to contribute enough to get the company match. But the lack of broad buy-in suggests many 401(k) savers are missing out on an important way to build retirement security.


With a traditional 401(k) you delay the tax bill and your money compounds over time. You get an upfront break that reduces taxable income. The tradeoff: Your later withdrawals get taxed as ordinary income. Stands to reason that prepaying — as you do with a Roth account — makes sense when you’re in a low tax bracket, especially for younger workers yet to reach peak earnings.

An analysis by T. Rowe Price found that a 30-year-old saving in a Roth 401(k) would have 17 percent more spendable income in retirement even if his pre- and post-retirement tax rates were the same. If his retirement tax rate is 5 percentage points higher, the Roth 401(k) will generate 25 percent more income than the after-tax money from a traditional 401(k). A future tax rate 10 percentage points higher will generate nearly 35 percent more spendable income in retirement compared to the traditional, courtesy of the time factor of tax-free (not tax-deferred) compounding.

While the young get the greatest benefit, even middle-agers who anticipate a lower tax rate in retirement would likely be better off saving via a Roth 401(k). “Unless you’re planning for a steep lifestyle change in retirement, what’s likely is that at best you might drop into a tax rate a few percentage points lower,” said Stuart Ritter, a senior financial planner at T. Rowe Price.

For example, the tax bracket for a 45-year old married couple with taxable income of $200,000 is 28 percent. If they retired today, that income would have to drop below $74,000 to fall into the 15 percent tax bracket. More likely, they’d be in the 25 percent bracket, which tops out at $148,500 for married couples filing jointly. T. Rowe Price estimates that even if they pay a tax rate in retirement just three percentage points lower, the Roth 401(k) will leave them with 8 percent more spendable income in retirement than a traditional 401(k).

Only if the future tax rate is more than 10 percentage points lower than the initial tax rate does the traditional 401(k) becomes a better deal for the 45-year-old couple. That would be a large lifestyle haircut even if federal tax rates merely stay steady.


For 55-year-olds the traditional 401(k) becomes the smarter choice when the future tax rate is at least 8 percentage points lower. A married couple in the 35 percent federal tax bracket today (so income between $405,101 and $457,600) would need to get by on income of no more than $226,850 (the top of the 28 percent federal tax bracket) to pull that off.

Higher-income earners need to carefully navigate potential short-term tradeoffs. For example, two fifty-somethings can each defer up to $23,000 this year in a traditional 401(k). That’s a lovely $46,000 reduction in taxable income. Put that in the Roth 401(k) and you lose that upfront tax break, which could wreak alternative minimum tax havoc.

And remember, if you opt for the traditional 401(k), the IRS will come knocking at age 70 ½, expecting you to start taking annual required minimum distribution (RMDs) — forced taxable withdrawals — from your savings. RMDs are taxable income and make it harder to generate a steeply lower tax rate.

If you don’t think you’ll rely heavily on your 401(k) savings in retirement, a Roth 401(k) looks even better. Roll it into a Roth IRA before age 70 ½ and you won’t suffer forced withdrawals. That can help manage taxable income in retirement and give you the latitude to keep more of your retirement funds growing tax-free for heirs.

SOURCE: http://www.bloomberg.com/news/2014-05-08/one-of-the-best-retirement-deals-9-out-of-10-people-ignore.html

What to Expect Now That Britain Has Voted to Leave the E.U.

It’s troubling news for investors and savers, but traveling abroad may suddenly cost less

The surprise vote by Britons to exit the European Union — nicknamed Brexit — has roiled financial markets across the globe and could have an impact on the retirement and finances of Americans.

Here’s what you can expect:


Stock markets across the globe have taken a dive, concerned that the United Kingdom may be headed now for a recession that in turn will drag down the economies of the rest of Europe and the United States. The U.S. market, which rallied a day ago on expectations that Britain would remain in the European Union, forfeited about 3 percent early Friday based on the S&P 500 index.

More than half of Americans are invested in the stock market, largely through retirement plans at work. And many workers have been encouraged in recent years to diversify their portfolios and invest overseas. These investors will likely see their balances drop — at least for the next few months, experts predict. That’s bad news for retirees and others who must pull money out of the stock market at this time.

Financial firms are advising clients that there is no reason to panic.

Even if Britain eventually pulls out of the European Union, it will be a gradual process that will take at least a couple of years, says Tim Steffen, director of financial planning at Robert W. Baird & Co.

“If it looks like this will have a longer impact on people’s finances, you will have plenty of time to react to it,” he says.

Investment firms have been reaching out to clients with a similar message.

“Given that it may take several years for the specifics of Brexit to play out, and markets may be rattled as plans take shape, investors’ best protection is to hold a portfolio that is diversified across asset classes and regions,” the Vanguard Group wrote to its investors.

Nevertheless, some financial professionals see some positives from the stock sell-off.

“This is a good buying opportunity,” said Greg McBride, chief financial analyst with Bankrate.com. He favors investing in broad-based, low-cost index funds.

“Overall, I would recommend that investors think more about buying than bailing,” said Sam Stovall of S&P Global Market Intelligence in a statement. He sees long-term buying opportunities in mid- and small-cap stocks that have low international exposure as well as high-quality stocks with lower volatility.


Good news if you are shopping for a mortgage now. Interest rates on these loans have dipped slightly on the news of the vote, said Keith Gumbinger, vice president at mortgage research firm HSH.com.

“How far they can go down and stay down is really unclear at this point,” he said.

Investors fleeing stocks are seeking safety in U.S. Treasuries, and the rush of money flowing into these securities pushed their yields lower, Gumbinger explained. Mortgage rates closely track U.S. Treasury yields.

Credit cards, loans and savings rates

Before the Brexit vote, Federal Reserve policymakers were expected to raise short-term interest rates at least once this year, most likely after the November election, says David Payne, staff economist at the Kiplinger Letter. Now policymakers may not do so even then as they wait to see the economic fallout of Brexit here and abroad.

These short-term rates influence the interest rates consumers pay on credit cards and home equity lines of credit. So consumers can expect a reprieve from higher rates for many months to come.

On the other hand, those short-term rates also affect interest rates on bank CDs, savings accounts and money market mutual funds. So savers will remain stuck with today’s low rates for now.


The dollar already has appreciated against the euro and the British pound. “That will make traveling overseas less expensive,” Payne says. “It will be a good time for summer travel to Europe or England.”

George Hobica, president of the travel site Airefarewatchdog, agrees.

With the euro and pound weaker, fewer Brits and Europeans will visit the United States, causing the airlines to try to attract more customers by lowering the price for Americans traveling to Europe, he said.

“The day after the Brexit vote, we saw airfares to London on Virgin Atlantic and other airlines for fall travel reduced to $500 round-trip,” Hobica said in a statement.

He also advises travelers who have already made hotel and other land arrangements in Europe to see if they can rebook at a better price now that the exchange rates have fallen.

By Eileen Ambrose, AARP

Source: http://www.aarp.org/money/investing/info-2016/britain-voted-to-leave-eu-what-to-expect-ea.html

MassMutual Settles 401(k) Suit with its Employees for $31 million

The insurer joins other firms such as Fidelity Investments and Ameriprise Financial in settling allegations over excessive 401(k) fees in their own company plans

Massachusetts Mutual Life Insurance Co. has agreed to a nearly $31 million settlement in an excessive-fee lawsuit involving the firm’s own retirement plans, joining the ranks of other prominent retirement services providers that have settled allegations over their company 401(k) plans.

The class-action suit, Dennis Gordan et al v. Massachusetts Mutual Life Insurance Co. et al, concerned two of MassMutual’s retirement plans: the $2.2 billion Thrift Plan and the $200 million Agent Pension Plan, in which MassMutual served as record keeper and investment manager.

Plaintiffs, who are current and former plan participants, allege defendants breached their fiduciary duty under the Employee Retirement Income Security Act of 1974 by causing unreasonable administrative fees to be charged to the plans, offering high-cost and poor-performing investments, and offering a fixed-income option that was “unduly” risky and expensive.

Parties to the suit filed a motion June 15 in the U.S. District Court for the District of Massachusetts seeking preliminary approval of their settlement agreement, which includes a $30.9 million payment by MassMutual as well as certain non-monetary provisions meant to benefit plan participants.

Other firms such as Fidelity Investments and Ameriprise Financial have settled similar suits alleging excessive 401(k) fees, for $12 million and $27.5 million, respectively.

Non-monetary provisions include, in part:

  • Using an independent investment consultant, ensuring participants aren’t charged more than $35 for standard record-keeping services and not assessing record-keeping fees on a percentage of assets;
  • Reviewing and evaluating all investment options in the plan; taking into consideration the lowest-cost share class available for each fund, collective-investment-trust-fund and separately-managed-account alternatives; and passively managed funds for each category or fund offering;
  • Considering at least three finalists in making an investment selection.

“While MassMutual denies the allegations within the complaint and admits no fault or liability, we are pleased to put this matter behind us, avoiding the expense, distraction and uncertainty associated with protracted litigation,” spokesman Michael McNamara said in an e-mailed statement. “Importantly, the amount of the settlement is not material to MassMutual’s financial strength, nor its 2016 financial results.”

“MassMutual employees and retirees are going to have a great plan going forward, after this settlement is completed,” said Jerome Schlichter, managing partner at Schlichter, Bogard & Denton and lead attorney for plaintiffs.

Mr. Schlichter has been a pioneer of excessive-fee litigation in 401(k) plans over the past decade. He secured the largest-ever settlement in such a case last year — $62 million, paid by Lockheed Martin Corp.

He’s won other large settlements with companies such as The Boeing Co., Bechtel Corp., International Paper Co., Caterpillar Inc., General Dynamics Corp. and Kraft Foods Global Inc., and won a decision in the first 401(k) fee case to be heard by the Supreme Court, Tibble v. Edison.

Mr. Schlichter and his firm stand to collect attorneys’ fees of up to $10.3 million from the MassMutual settlement. The suit was originally filed in November 2013.

Source: http://www.investmentnews.com/article/20160617/FREE/160619920/massmutual-settles-401-k-suit-with-its-employees-for-31-million

Annual 401(k) Plan Education: 5 Action Items for Participants

By Robert C. Lawton

 Here are five items plan sponsors should discuss with their investment advisors may wish to consider sharing with plan participants as part of the annual employee education session:

  1. Contribute as much as you can. Remember, we all need to average at least 13% in contributions to our 401(k) accounts each year if we are to retire without reducing our standard of living. Since most of us don’t contribute anything close to that amount, advise participants to consider increasing their contribution rates by at least 1% every time they get a raise. Increasing contributions gradually when participants experience a salary increase minimizes the impact of additional 401(k) contributions on take home pay.
  1. Grab all of that free money. Most 401(k) plans have a company matching contribution and, believe it or not, most participants don’t contribute the amount necessary to receive the maximum employer match. As a result, they leave free money on the table. Quick, what is the best performing investment in any 401(k) plan? Of course, employee contributions that result in a company match! In most plans the company match is dollar for dollar up to a certain percentage — resulting in a 100% immediate return on investment.
  1. Consider target date funds. Most participants are too busy to manage their 401(k) accounts properly. As a result, many only look at them in times of stress (think crashing markets). The decisions some make at those points aren’t necessarily helpful in achieving a comfortable retirement. The experts believe 75% of all plan participants should invest 100% of their account balances in target date funds. Professional management can help participants avoid making bad decisions in times of stress.
  1. Set goals. Not enough of us do this. It’s hard to discipline ourselves to save when what we are saving for is ambiguous. It is easier for participants to set meaningful savings goals if they know whether they are going to travel, relocate to a warmer climate or continue to work in retirement. Even if their retirement turns out completely different from what they had planned, having goals now makes the future seem more concrete.
  1. Don’t take withdraws or borrow. Plan loans are one of the worst investments participants can make. Amounts borrowed are double-taxed and the rate of return on borrowed funds (a loan is one of the investments in a borrower’s account) is equal to the interest rate on the loan. Remember the S&P 500 returned nearly 32% in 2013! Withdrawals permanently remove assets from participant retirement accounts. Help your participants stay on the path to retirement readiness.


Source: Employee Benefit News


Make 401(k)s a Vault, Not an ATM

If they want to, employers can make the loan process harder for plan participants.
Experts agree that taking a 401(k) loan rarely is a good idea. Still, research suggests the number of plan participants doing just that is on the rise, particularly since 2008, when layoffs and financial turmoil left many American workers with nowhere else to turn for funds.

“We have seen an increase [since 2008], and I don’t think that’s very surprising, given the economy today,” says Denise Preece, assistant vice president of field services with OneAmerica.

According to Aon Hewitt, nearly 28% of active participants had a 401(k) loan outstanding at the end of 2010, a record high. Nearly 14% of participants initiated new loans last year, slightly higher than in previous years. The average balance outstanding was $7,860, which represented 21% of these participants’ total plan assets.

And while the majority of participants (68%) had only one loan outstanding, 29% had two loans outstanding simultaneously, and 3% had more than two loans.
Loan usage varies significantly based on the participant’s situation, according to the Aon Hewitt research. Middle-aged and middle-income participants are most likely to have outstanding loans, while women with lower salaries are more apt to take loans than their similarly paid male counterparts. Women are also more likely to take more than one loan at a given time, as compared to men.

Even the time of year affects whether or not your participants are likely to take loans from their 401(k), says Catherine Golladay, vice president, participant services, with Charles Schwab. In the fall months, particularly September, there’s always a fairly dramatic increase in the number of loans taken. Likewise, in the spring, particularly in March, there’s always a dramatic decrease.

“You can look at typical behavior and draw some assumptions,” she says. “In September, one typical thing someone might do is look at their 401(k) loan as an opportunity to help them fund their education. That’s the time frame when tuition is due. My hypothesis on the spring is, unfortunately, I think individuals may be using their tax returns as a way to help them smooth out cash flow if they’ve gotten behind. So they look to that as a resource and don’t go to their 401(k).”

Allowing plan members to take several loans concurrently is probably not in their best interests, agree industry experts. When Senators Herb Kohl (D-Wis.) and Michael Enzi (R-Wyo.)

introduced the Savings Enhancement by Alleviating Leakage in 401(k)s Act last May (see “SEAL Act provisions” sidebar), they included a clause that would have limited to three the number of loans participants could take from their 401(k) at any one time. That provision, however, was later withdrawn, since it’s up to plan sponsors to decide how many loans participants are allowed to take at once.

“Loans are not a protected benefit and the employer can choose to manage it how they want,” explains Patrick Shelton, managing member of Benefit Plans Plus.
Loans are not all bad, however, says Pamela Hess, director of retirement research with Aon Hewitt, and 401(k)s are an appealing way to access money since participants essentially are borrowing from themselves.

“If it’s a short-term need and the 401(k) fits the bill, it really doesn’t do long-term harm. As long as it’s not constant loan taking, as long as you pay it back and keep saving,” she says.

The problem is many participants may not realize that if they lose their jobs, or even quit their job to go somewhere else, that loan is due pretty quickly – usually within 60 days. “And a lot of people can’t pay it back or don’t pay it back, and then they owe taxes on that money as well,” says Hess. “And then it becomes a permanent withdrawal from the system.”

There are a few things employers can do to discourage excessive loan taking. First, amend your plan document so that employees are only allowed to take one or two loans at a time.
Some employees will take a loan from their 401(k) to help them with a down payment on a house. “That’s usually something that’s part of a longer-term plan, and it’s not a case of someone using a loan to manage cash flow or for a quick fix,” says Golladay.

Second, consider adding a loan fee if you don’t already have one. “You don’t want to hurt people who need money,” notes Hess. “But having a loan fee does help curb some of the excessive loan taking – a $75 fee, for example. For people who need it and are taking a significant amount, it’s probably not going to be a big deal, but it can deter people who are maybe taking smaller amounts.”

Third, consider adding a timeout between loans. For example, make employees wait, say, 60 days before letting them take another loan.

Finally, encourage those who do take loans to continue saving. “Do a targeted message, for example, saying ‘you took a 401(k) loan this month. Don’t forget to keep saving,'” suggests Hess. “Personalized communications can be really impactful.”

And if your plan doesn’t already have a loan provision, keep it that way, advises Golladay. “I’d be hard-pressed – if you didn’t have a loan provision in your plan – to think of a reason why you’d want to add that,” she says. “If at this point you don’t have a loan provision, I wouldn’t recommend it as something you should do.”

Preece says she’s heard more discussion over the past few months about making it harder for participants to access loans. “We’ve had a couple of plan sponsors who’ve not wanted participants to have the ability to request a loan on the Internet, for example,” she says. “I don’t think there’s a wholesale shift in that, but it’s interesting that it is more of a topic of discussion than it was, say, two years ago.”

Common thinking many years ago was that plan sponsors should have a loan provision in place because it would help with enrollment – more employees would participate in the plan if they knew they could access their money in an emergency. But Golladay says she’s not sure that argument holds true anymore, now that auto-enrollment in plans and auto-escalation of contributions have become more prevalent.

“We don’t see many people opting out of those, so employers might want to challenge their common thinking around loan provisions,” she says.

Says Shelton: “Our philosophy as retirement plan consultants is basically to discourage loans. 401(k) plans are not a checking account. When we’re talking to our plan sponsors, we’re encouraging them to not offer loans, first of all, and if they do, to make it as restrictive as possible. Have a minimum loan amount of $1,000, for example, and charge a fee.”


Source: http://ebn.benefitnews.com/news/401k-loans-retirement-2717891-1.

Uncovering the Hidden Fees in Retirement Plans

Financial advisers understand there are undisclosed fees on employer-sponsored retirement plans, but an alarming number of our clients don’t. In fact, according to a recent AARP study, seven out of 10 participants in such plans have no clue what they’re paying in fees—or how those costs can eat into their retirement savings.

We’ve been trying to educate clients about this for a while, but a Department of Labor rule that took effect July 1 has made the issue part of a national conversation. Essentially, the rule requires that all hidden fees attached to retirement plans and mutual funds be disclosed to employers and employees. Not surprisingly, many of the administrators and big firms behind 401(k)s, 403(b)s, and SEP individual retirement accounts weren’t thrilled by the change.

Disclosed fees, such as operating fees and advisory fees, account for only about 10% of the total fees attached to many retirement plans. Hidden fees account for the rest, and they are difficult to understand. Even highly trained fiduciaries and actuaries sometimes struggle to calculate the actual cost of undisclosed fees.

While the fee-disclosure law is a step in the right direction, it will be helpful only if plan participants can decipher the information. That’s where advisers come in. They have a duty to stay on top of the fee issue and teach clients how hidden costs affect retirement savings.

We’ve found private workshops to be an effective way to educate consumers. Our clients often invite their peers and co-workers to attend the workshops. We do risk and fee analysis with the group, make sure they understand the fees attached to their account, and, most importantly, we cover income planning.

Many people are heading toward a retirement in which they will have to rely on their 401(k), IRA or similar plan for the bulk of their income. It’s important that advisers make the risks of that clear and ensure that clients have a portion of their income in a low-risk account. It’s going to take people a while to adapt to the fee-disclosure information, and advisers need to be at the forefront of those conversations.

By Laura Stover

Source: http://online.wsj.com/article/SB10001424127887323940004578257793514318474.html

9 Worst Social Security Mistakes

Social Security benefits are the bedrock of many Americans’ retirement income plans, and you can boost your financial security in retirement by maximizing that inflation adjusted lifetime income stream. Making informed decisions about what kind of benefit to take, and when, can boost your total benefits payout. But Social Security has a bevy of complex rules for claiming benefits that you need to understand. An error can be costly.


  1. Planning for the Wrong Retirement Age

Many people think of retirement age as 65. But with Social Security, full retirement age varies depending on when you were born. For those born between 1943 and 1954, full retirement age is 66. But starting with those born in 1955, full retirement age will gradually rise in increments of two months until reaching age 67 for those born in 1960 and beyond. Full retirement age matters for two reasons: One, it’s the age when you can claim your full benefit with no reduction, and two, it’s the age that unlocks a host of claiming strategies that allow you to boost your benefits. A person who claims at age 62 — the earliest age you can take Social Security retirement benefits – but whose full retirement age is 66 will take a 25% permanent cut in monthly benefits. For those whose full retirement age is 67, a person who claims early at 62 will take a 30% permanent cut. And at full retirement age, you can use claiming strategies such as “filing and suspending” and “restricting an application to spousal benefits” that younger retirees cannot. These strategies can help a couple boost their total benefits. At full retirement age, you can also earn as much as you want while taking benefits — early claimers are subject to an income threshold that can temporarily cause them to forfeit some benefits.


  1. Not Working for 35 Years

Your Social Security benefit is calculated using your top 35 years of earnings. If you have less than 35 years in your earnings record, perhaps because you were at home raising kids, those missing years of earnings will factor in as zeros. The good news is those zeros can be replaced with a year of earnings, no matter what age you return to work. Even a year with part-time earnings can knock out a zero. The other piece of good news: Those 35 years don’t have to be consecutive. So if you had your highest earning years in, say, your forties, any years of lower-earning work later in life won’t decrease your benefit. Say you want to work part-time in retirement after four decades of full-time work, your lower earnings from part-time work will not lower your benefit. You can also work while taking benefits, and those earnings can be used to boost a benefit. The Social Security Administration reviews earning records of beneficiaries annually. If you had a year of earnings that topped one of the 35 years being used to calculate your benefit, your benefit will be adjusted upward — even if you are currently taking benefits.


  1. Claiming Too Early

The earliest age you can claim a Social Security retirement benefit is age 62. But if your full retirement age is 66 and you instead take a benefit at age 62, your monthly benefit will be cut by 25% for the rest of your life. So if your full benefit would be $2,000, that’s a $500 a month cut for life. If you wait until full retirement age to claim, you will get your full benefit — $2,000 in this case. If you can wait even longer to claim, you can earn an extra 8% a year in delayed retirement credits until age 70. For someone whose full retirement age is 66, delaying until 70 provides 32% boost. With a $2,000 full benefit, that’s an extra $640 a month. With life expectancies lengthening, for most people, having at least the higher-earning spouse delay benefits until full retirement age or beyond makes the most sense. That higher boosted benefit will last the lifetime of the longest-living spouse. Of course, in some instances, it can make sense to claim early. Singles might want to claim by full retirement age, and often lower-earning spouses might want to claim early since they will later switch to a higher spousal or survivor benefit.


  1. Not Thinking of Your Spouse

If you are married, it’s not just your benefit you should worry about. Instead, a savvy move is to coordinate the timing of both claims. You and your spouse can bring in some income while maximizing your total benefits. For instance, the higher-earning spouse could delay his benefit until age 70, so that benefit earns delayed retirement credits of 8% a year. In the meantime, the other spouse could take a spousal benefit to bring in some income while the couple waits for the higher earner’s benefit to “grow.” But even more importantly, it’s critical to consider your spouse’s income after your death. If the higher earner delays his benefit until age 70, the surviving spouse at full retirement age or beyond can receive 100% of that boosted benefit, which will adjust for inflation and last her lifetime. And that extra income could go a long way if she lives well into her nineties or beyond.


  1. Not Filing and Suspending

When you claim a Social Security benefit, you don’t actually have to take it right away. You can file for a benefit and then immediately suspend it. But why do that? For a couple of reasons. First, if you’re married, your spouse cannot take a spousal benefit without you filing for yours. By filing and suspending, you can unlock the spousal benefit for your wife or husband, while letting yours earn delayed retirement credits. Say a 66-year-old wife’s spousal benefit is worth $1,000 but her 66-year-old husband wants to wait to take his benefit at age 70. If he didn’t file and suspend his benefit, the couple would be leaving $48,000 on the table while they wait for his benefit to grow. Singles also can benefit from this strategy. Filing and suspending at full retirement age allows a beneficiary some “insurance” when making the decision to delay. Say you get a serious medical diagnosis, and you decide you need to take benefits at age 68, instead of delaying until age 70. You could choose to get a lump sum going back to the date you filed and suspended. If your monthly benefit at full retirement age was $2,000, that would be a lump sum worth $48,000. If you didn’t file and suspend at full retirement age, the Social Security Administration would offer you a lump sum worth only six months of benefits.



  1. Not Running the Numbers for All Scenarios

Making assumptions often gets people into trouble and it’s no different when it comes to claiming Social Security. Immediately assuming one strategy will give you more money than another could cost you in the long run. You need to run the numbers for all strategies that apply to you — or you could end up leaving money on the table. Say the wife qualifies for a $700 monthly benefit and the husband a $2,000 benefit. Both are at full retirement age and want to maximize their benefits by letting his higher benefit earn delayed retirement credits until he turns 70. With his wife’s benefit significantly lower than his, the husband might assume that the best option will be for him to file and suspend his benefit so his wife can take a spousal benefit of $1,000. Instead the couple could employ the “restricted application” strategy, which in this example would provide a larger total payout. The wife would take her $700 benefit and the husband would limit his application to a spousal benefit only off her record, while letting his own benefit earn delayed retirement credits. Using this strategy allows the couple to bring in $1,050 a month — $50 a month more until he turns 70. For that 48 months, that’s an extra $2,400. At that point, he’ll switch to a boosted benefit and his wife can switch to her higher spousal benefit.


  1. Not Claiming a Widow’s Benefit

If you are a widow or widower, you can claim a survivor benefit off your deceased spouse’s record. A survivor benefit can be claimed as early as age 60, but it will be reduced if you take it before your full retirement age. At your full retirement age or later, the benefit is worth 100% of the benefit amount your spouse was receiving at the time of his death — or what he would have been eligible to receive if he hadn’t yet claimed his benefit. Any delayed retirement credits earned by the time of death will be included in the survivor benefit. And if you remarry after age 60, you can continue to take the survivor benefit. If you are eligible for a survivor benefit, consider how it stacks up to your own. If delaying your own benefit to age 70 would cause it to exceed the amount of your survivor benefit, you might want to claim the survivor benefit first and switch to your own at 70. Otherwise, if your own benefit is significantly smaller, you might consider claiming your own benefit early at age 62 and then switching to the survivor benefit once you hit full retirement age — the survivor benefit isn’t reduced if you claim your own benefit early.


  1. Not Staying Married at Least 10 Years

If you are on the cusp of divorce at, say, nine years and nine months, try to hold off on the date of the divorce decree for another few months. If you are now single but had been married for 10 years or more, you will be eligible for your ex’s Social Security benefit. In fact, this can benefit both ex-spouses: If you claim benefits at least two years after your divorce, you can each claim a spousal benefit on the other — an option not available to couples still married. Qualifying on an ex-spouse’s record lets you engage in some of the same maximizing benefits tactics that still-marrieds can use. For instance, at full retirement age, you could restrict your application to a spousal benefit and let your own benefit earn delayed retirement credits until age 70. If your own benefit was worth $1,500 and you qualified for a spousal benefit of $1,000 off your ex’s record, you could bring in $48,000 if you took the spousal benefit starting at age 66. At age 70, you would switch to your own benefit, which would have grown to $1,980. When your ex-spouse dies, you can qualify for a survivor benefit off his record, too — that’s worth 100% of what your ex received at death. Using the example above, if the ex-spouse died receiving a $2,000 a month benefit after you had switched to your own boosted benefit at age 70, you could switch to a survivor benefit off the ex’s record and get an extra $20 a month. If he too had delayed to age 70 and had been receiving $2,640 a month because of delayed retirement credits, switching to a survivor benefit would up your monthly income by $660.


  1. Assuming There’s No Do-Over If You Claimed Early

Years ago, if you claimed Social Security early and later regretted the decision, you could change your mind years down the road. You had to pay back all the benefits you had received, but you could then restart your benefit at a higher amount. The government cracked down on that move, but there are still ways to get a do-over if you claimed early but now wish you hadn’t. If you quickly regret the decision, you can withdraw your application within 12 months of when you applied. You pay back the benefits you received and then restart at a higher amount at a later time. But if you have passed that 12-months mark, you have a few other options. Once you turn full retirement age, you can voluntarily suspend your benefit — you will forgo payments now but your benefit will earn delayed retirement credits until you restart it again. As noted previously, working while taking a benefit can also make a difference. If those years of work replace zero or low earning years in your top 35 years of earnings, your benefit can get a boost. And if you were working while claiming benefits early and lost some benefits to the income threshold known as the “earnings test,” there’s a silver lining – those benefits are really only lost temporarily. Once you turn full retirement age, your benefit will be adjusted upward to account for those forfeited benefits.


Written by: Rachel L. Sheedy for Kiplinger

Source: http://www.kiplinger.com/slideshow/retirement/T051-S001-costly-socialsecurity-mistakes/index.html

What the DOL’s Fiduciary Rule Doesn’t Say

The Department of Labor’s much-anticipated fiduciary rule is ushering in many changes across the retirement services landscape, and the new rules governing the “what, how and why” for advice at the time of a participant’s job change will undoubtedly transform the rollover-to-IRA market. However, a closer reading of the fiduciary rule sends a clear, if unstated, signal to plan sponsors, financial advisers and recordkeepers: Absent a compelling reason to roll over to an IRA, keep participants invested in a qualified defined contribution plan throughout their working lives.

Why would the Department of Labor send such a signal? For starters, qualified plans are already subject to fiduciary standards and regulatory protection under ERISA, which has been in effect for more than 40 years. These standards include an obligation to negotiate fees (lower fees achieved through group pricing is a widely recognized benefit), regularly review investment options, routinely communicate plan provisions and changes, and, in all respects, act in the best interests of the plan’s participants. The DOL’s goal of extending these types of protections to participants who roll over to an IRA is commendable. But sponsors can keep participants from having to worry about whether the advice they receive related to rollovers is in their best interest simply by enabling them to stay in qualified plans to begin with.

Upon separation from employment, participants are faced with four distribution options: Leave balances behind in the prioremployer plan, roll the balance over to an IRA, roll the balance over to their new-employer plan, or cash out. With the advent of the fiduciary rule, the DOL is clearly indicating that participants should receive objective, conflict-free guidance. Any specific recommendation given to the participant is now deemed a fiduciary act.

In many instances, keeping participants’ savings in the qualified plan system — either in the prior-employer plan or in their new plan — is the best option for them. As has been shown through experience, participants have the highest probability of saving for a financially secure retirement if they stay invested in qualified plans until they retire, never cash out their savings, and consolidate their accounts as they move between employers. Sponsors can make this objective much easier for participants by providing unbiased participant transition management assistance at the point of job change, and by actively
encouraging and assisting with plan-to-plan portability for new, current and former participants.

In the current environment, DIY plan-to-plan portability is a manual, complex and time-consuming process, which leads too many participants to leave their 401(k) balances behind when they change jobs (or worse, cash out) because it’s the easiest
choice. A groundbreaking Boston Research Technologies study on mobile workforce behaviors, published last year, found that 32.8% of participants left their savings behind in their most recent former-employer plan when they changed jobs. The most frequent reason cited for this decision was that the participants felt rolling their accounts into their current-employer plans would take too much time.

However, the Boston Research Technologies study also found that the majority of millennials, Generation-Xers and baby boomers would roll their 401(k) accounts into their current-employer plans if the employer paid for it, and even more of them would roll in their IRAs if the employer paid for that as well. Fortunately for sponsors, the Plan Sponsor Council of America reported in its industry survey published this past January that 97.6% of defined contribution plans can accept roll-ins from other plans.

Actively facilitating 401(k) account consolidation in current-employer plans is in participants’ best interest. The average worker changes jobs at least 7.4 times over the course of 40 years, according to the Employee Benefit Research Institute. Using this
EBRI finding, we have calculated that if a worker changes jobs and leaves behind a 401(k) account for the first time at age 25, and repeats seven times by age 65, they will have lost more than $30,000 in administrative fees on multiple accounts.

Furthermore, the New England Pension Consultants annual study for 2014 reported that the median recordkeeping fee for defined contribution plan participants was $70. If we build on this finding, a hypothetical 30-year-old who changes jobs today and leaves behind their 401(k) balance in their former-employer plan would end up paying $2,520 in fees on that account by age 65. The worker would also lose future earnings from compound interest on the $2,520 in fees, leading to a total loss of $6,708.54 on that account by age 65 (assuming the account experiences 5% growth per year).

Given that a single unconsolidated 401(k) account during a participant’s working life can deplete over $6,700 from a participant’s savings, sponsors that actively promote and facilitate seamless plan-to-plan portability are acting in the best interest of all participants. This is in line with the DOL’s fiduciary rule, which aligns regulatory intent with the best interest of the millions of participants that change jobs every year — keeping workers invested in the qualified defined contribution plan system.

By Spencer Williams
Published May 03 2016

Source: Employee Benefit News


Bolster the Private Retirement System, Says U.S. Chamber of Commerce

The U.S. Chamber of Commerce has made suggestions in a recent paper for ways to bolster the private sector retirement system.

The keys to strengthening the system, says the Chamber, is to strengthen the current retirement structure, address the demographic changes and retirement needs of an evolving workforce, and encouraging innovation and flexibility. The paper offers specific recommendations in each area.

To strengthen the current private system, the chamber suggests: supporting retirement security through tax policy; reforming multiple employer plans (MEPs) to expand their use; streamlining notice requirements; encouraging the use of electronic disclosures;
developing incentives for plan sponsors that want to maintain defined benefit plans; addressing the required minimum distribution rules; increasing the involuntary cashout limit; facilitating the preservation of retirement assets; and encouraging the increase of plan sponsorship among small businesses.

To address demographic changes and the retirement needs of an evolving workforce, the chamber suggests: encouraging employers to offer voluntary products that address longevity; eliminating barriers to phased retirement; encouraging additional distribution options to facilitate lifetime income; encouraging and expanding retirement education and literacy; ensuring that state sponsored retirement programs do not undermine ERISA or create unfair competition in the marketplace; and encouraging the voluntary use of private disability insurance and furthering education about its benefits.

Steps the chamber argues will encourage innovation and flexibility include: providing small businesses a dedicated voice on federal advisory councils; assessing the future role and mission of the Pension Benefit Guaranty Corporation; encouraging new plan designs;
encouraging automatic plan features; and promoting the benefits of employee stock ownership plans (ESOPs).

The Chamber contends that progress has been made in supporting the employerprovided
system, but argues against resting on one’s laurels. “Additional steps are necessary to continue the success of this system. It is imperative for policymakers and regulators to continue to develop additional initiatives that maintain this positive trajectory and build on the success of the private retirement system,” the paper says.

Source: http://asppa-net.org/News/Article/ArticleID/5852/Bolster-the-Private-Retirement-System-Says-U-S-Chamber-of-Commerce