Benefits and beyond, c. 5 small employers.
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Benefits and Beyond, C. 5 Pensions- Small Employers Retirement Planning Thomas E. Murphy
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Transcript of Benefits and beyond, c. 5 small employers.
Benefits and Beyond, C. 5
Pensions- Small Employers Retirement PlanningThomas E. Murphy
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Internal fairness Externally
competitive Positively affect
participant behaviors
Cost effective and well-administered.
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Relevance of Benefits Model?
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Some smaller employers cannot afford typical DBP, and even difficult to sponsor a DCP.
Too many legal compliance issues Too much administrative expense But, what about HR issues? Why not use the Individual Retirement
Account (IRA) as a tool to devise a more efficient employer sponsored plan?
Evolution . . .
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Doesn’t everyone dream of retiring?
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How about an Individual Retirement Account?
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What is an IRA?
Not ordinarily related to employment
How can employer use it?
Retirement account Funded by individual Investments directed
by owner Favorable tax
treatment But, there are limits
on amounts that can be contributed and on earnings of owner
Very useful in “rollovers.”
Minimum distribution and early withdrawal limits apply
Roth IRA – after tax contributions.
Higher AGI limits
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The Limits (2010)
IRA and Roth Application
Regular:$5000$6000 (after age 49)AGI - $53,000 (phased)Roth:$5000; $6000 (age 50)AGI: $101,000 (2010 –
no limit)Can participate in ER
plan.
Tax favored retirement account
Good vehicle for 401(k) or other “rollovers.”
In such cases, limits do not apply
Subject to age 70.5 RMD, and age 59.5 early distribution rules.
See IRS Rules on IRAs
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Voila! The SIMPLE est arrive`
No discrimination testing! It’s Portable
Applicable to employers with no more than 100 employees.
Uses IRA as funding vehicle.
Limited administration.
Employee and Employer can contribute.
Employee directs investments of her choice.
Limit on employee contributions ($11,500).
100% immediate vesting.
Catch ups for over age 50 - $2500
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More on the SIMPLE*
Subject to 415 Limits *Savings Incentive Match for Employees of Small Employers
Employer must match 100% up to 3% of salary
Or, if no match, the employer must make a 2% of salary, non-elective contribution for everyone!
Employees making $5000 are eligible.
Cannot use SIMPLE if there is another DCP or DBP covering employees.
Elective deferrals and employer contributions must be made to a SIMPLE IRA, or a 401(k).
Distributions subject to Early Distribution (59.5)
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More plans . . .
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Employer (pre-tax) contributions only (after 1997). No employee income deferrals.
Contributions made to a SEP IRA Maximum contributions (25%) w/ indexed cap -
$49,000 for 2010. Investments self-directed; all employees covered
who make more than $550. It is portable Employer can elect not to contribute in a given
year. Testing is not a real issue. Why? No catch ups
SEP . . . What’s this?
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What about the Benefits Model?
The risk allocation? Can be used by
employers with more than 100 employees.
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SEPs . .
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“Let’s get rid of the longevity and investment risk but still have it look like a DBP”
A Money Purchase Plan – a benefit is targeted but not guaranteed.
Employer contributions expressed as a percentage of pay are made to the fund.
Favorable tax treatment Benefit is portable Limits on contributions and other IRS rules
Money Purchase or TargetedPlan
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A DBP or DCP (Ind. 401k) typically for self-employed
Favorable tax treatment
Contribution limits based on percentage of earned income not compensation.
Age 59.5 and 70.5 limits apply
Can have a Money Purchase and Profit Sharing KEOGH.
Available to sole proprietorship or partnership
Must cover all over age 21.
Contribution limits of 20% of business income ($40 K)
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KEOGH
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Age of workforce Competition – degree of Industry Labor intensity Cost, margins, and price sensitivity of
product or service Affecting behaviors of employees Financial flexibility Simplicity of administration.
Business factors and plan choice:
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Impact of 2008-09 Recession?
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Migration from DBPs to DCPs Will employees have sufficient income to
retire? What about investment risk? Will they outlive their retirement income? What impact does migration have on
employer HR succession strategy? Use of early retirement incentives by
employers seeking to reduce labor force.
Issues in Employer sponsored retirement
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See 5.1 at page 138 – Business Factors that affect type of plan to choose.
Retirement Planning – see pages 143-146. See Table 5.2 (Review of Pension Plan
Design Features) at page 149. Safe Harbors: (1) Elective deferrals,
employer matches 100% up to 3% of salary, and 50% up to 5% of salary. (2) Non-elective, company contribution of 1% of salary, and 2% after 5 years of service. Maximums covered by §415.
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Some Important Figs and Tables
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Some ideas!
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Move to jointly funded DBPs Are DBPs inherently more efficient and cost
effective? DBPs rely on the investment expertise of
professional money managers. Should all benefits be distributed through
an annuity? (See: www.immediateannuities.com )
Should we simplify all the various DCP approaches into one, retirement savings vehicle?
Some ideas to consider
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Are employers spending more on Safe Harbor 401(k)s? Would it be cheaper to simply offer a DBP?
Government “takeover” of 401(k) plans – or mandated IRAs for all?
Life cycle/more secure investment funds or a mixed bag?
Hybrid 401(k) plans – evolve assets into annuities.
What’s a DBK – a 401(k) with 1% “floor plan” DBP. During the recession - government temporary
rules on RMD, Safe Harbor, and Early Distribution rules
Some ideas – see my Blog
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Should the government mandate annuities for all DCPs?
What are the pros and cons?
What risks would such a plan affect?
What new problems might arise?
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Or . . . Can you go your own way alone?
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Principles and Strategies for Retirement Planning
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Aggregation, investments, and savings strategies will convert to disaggregation and spending strategies.
All the tax favored treatment will be converted to taxable treatment.
Try to minimize the impact of taxable treatment of distributions.
Life expectancy is a key element of the strategy here
Retirement Planning
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Retirement Planning
Shelter taxable investments
The Rule of 3 (or 4)!
Investment strategies should take into consideration the rate of inflation.
The amount needed is not necessarily a percentage of final average pay – it relates to your expected expenses.
Have a balanced portfolio and keep it balanced.
Save aggressively. Don’t “over stuff” your
401(k). Timing is important! Consider roll-overs of
your 401(k) at retirement.
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Exploit the tax implications of withdrawals Consider buying an annuity to resolve the
longevity risk Use websites to calculate savings necessary
for your retirement and best disaggregation strategies.
Retirement Planning
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If you come up short, you may have to go back to work, or delay retirement.
You may have to “replant” yourself into something entirely different.
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It’s never too early to start
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How about food service work?
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Other Issues
See the Blog The Book - Exercises
Will Baby Boomers leave the market and cause a slump in “buys?” (Blog)
What about IBM’s 401(k)? (Blog at page 119)
Can we “benchmark” and compare 401(k)s? See: www.brightscope.com/
No. 3 (www.nmfn.com/)
No. 4 (www.wsharpe.com)
No. 6 (www.bloomberg.com - calculators
No. 13 http://www.choosetosave.org/ballpark/
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With today’s market, be prepared for anything.
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At retirement age 65, would a 401(k) account of $1,000,000 be sufficient? What factors and calculations are relevant to answer this question?
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How much do you need?
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“During those morning commutes, I secretly agonized over whether I had enough money socked away to be so casually employed. I was worried about the Number . . . What are the chances you will live out your days in comfort? What happens if you don’t make it to your Number?” Eisenberg, L., The Number (2006)
What’s your parents’ “number?” (Exercise No. 2 at page 150)
The Number . . .
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