State of the Union Highlights and Notes for Employers to Remember

Automatic Enrollment

While there are several proposed changes, one change that impacts employers the most, is that employers that are not currently offering a plan would be required to offer an IRA or 401(k), with an auto-enrollment feature. This rule is currently proposed for employers with 10 or more employees, and employerswould also be eligible to receive up to a $4,500 tax credit for the cost of starting one.

If you are a business that currently sponsors a 401(K) Plan, SEP or SIMPLE IRA, then your plan will continue to operate as it has going forward, but there are likely changes coming down the road if these rules are enacted. The silver lining is that employers with existing plans could get a $1,500 tax credit for adding auto-enrollment features, but the current language doesn’t seem to require they be added to existing plans in the current proposal. 

Including Part Time Employees

One of the largest proposed changes that could impact current businesses with 401(K) Plans is the proposed change to include employees who have worked at least 500 hours in a year, for three consecutive years. Current regulations allow for employees to be excluded from participation if they never work 1,000 hours in a given year. While the rules will likely be a phased in, or have a grace period for enacting them, it would be wise for current plans to look at their current plan design, if the rules are enacted. Many plans are currently designed with these current rules in mind, so plans that have been able to pass discrimination tests in the past, could face new problems if these employees are brought into the plan only to opt out of contributing, or only do so at lower rates. 

What to Do Now?

The next key item to point out is that while these tax incentives are enticing, the important thing to do is, monitor the situation, and wait to see if these proposals to become law. While these provisions seemed widely supported in congress, many others did not. This means the proposed Retirement Plan rules could be dragged into the larger fight with the more polarizing proposals. Unfortunately, this means that if you were looking at adding an automatic enrollment feature to you plan in the beginning of 2015, you are faced with a tough decision of whether to move forward, or to wait for possible tax advantages. There is always a chance that the proposal goes through for the 2015 tax year, but if the proposal get delayed as a result of some of the more politically decisive issues, then you could miss out on these tax savings if the proposals are delayed till 2016. Of course, if you wait, there is just as much chance that the proposals never get enacted, and you delayed the auto-enrollment needlessly, further delaying time employees could be building towards retirement.

While these are currently only proposed rules, many of them are jointly supported as a way to better prepare our nation for retirement. There are many other more controversial proposals from the speech with the opportunity to derail the proposals around retirement plans. As always, make sure you are working with a retirement plan professional so they can help apply current and prosed changes to your specific situation.

401(k) Plan Lead the Charge in Helping Americans Save for Retirement

In today’s workforce, there are more and more employees participating in 401(k) plans. In 2014, there were approximately 94 million workers enrolled in Defined Contribution plans, most of those in 401(k) plans. Though there has been criticized throughout their history, 401(k) plans are the primary retirement savings accounts for most Americans, has benefited both the employees as well as the employers in tax savings and building towards a successful retirement.

In general, the 401(k) retirement plan offers various kinds of investment options, which can also include lower fund expenses and management fees that may be available to individual investors. There are also several features such as automatic enrollment, low-cost index funds, catch-up contributions for employees who are near retirement and higher contribution limits than are allowed in individual accounts.

The best benefit of the 401(k) plan is that it has several provisions for tax savings which are present in the contributions as well as the earnings. Traditional 401(k) retirement plans allow employees to save money for their future and make pre-tax contributions for their retirement, allowing those investments to grow tax-free. When money is drawn from the account in retirement, the employee pays taxes on those withdrawals.

More recently, ROTH contributions have been added to many 401(k) plans so employees can pay taxes on their retirement investments now, and allow them to grow tax-free and in retirement, they can withdraw the funds without taxes as long as certain rules are followed. Including the fact that the contributions are made from employees’ paychecks, making it an easy approach for employees to save, there is a reason it is one of the most popular ways for America to save for retirement.

Some of the benefits of a 401(k) plan are –

•        It helps to create a safe retirement account to save for your future expenses. Using a 401(k), one can successfully save up for retirement and this money can be invested in a diverse portfolio to grow your savings even further. 

•        To start saving in a 401(k) plan, an employee only has to contribute a very small amount to open their account, normally only $1 or more.

•        While you do not have to offer the plan to employees under the age of 21, the younger employees start to save, the more easily and earlier they can meet their retirement goals.

•        These plans offer significant tax advantages to businesses of all sizes. Whether a small firm, where the company is looking to save on taxes, to a large company looking to reward and retain employees, many business goals can be accomplished in a 401(k) plan.

•        Most 401(k) plans have easy-to-choose investment options like Target Date funds, which allow employees to make investment decisions once, and the fund allocates itself appropriately as the employee nears retirement.

•        Also, many plans have access to these savings when an emergency occurs, such as loans which may not need a specific reason to qualify for depending on your employer, to hardship withdrawals that can be taken for eviction, college tuition, uninsured medical expenses, purchase of a principal residence, funeral expenses and even damage to one’s principal residence.

Whether a small business owner or someone in the human resources field, it should already be well known the importance a 401(k) plan for both the health of the company and for its employees. The key to any plan though is making sure it is tailored to the specific goals of the company. Far too many 401(k) providers take a cookie cutter approach instead of designing the 401(k) plan for each client, and this may not only hinder a company from having the plan meet its goal, but can also have unintended consequences when not done properly. That is why it is so important to work with providers that specialize in the field and can address issues before they arise, such as Life, Inc. Retirement Services.

Are Your Employee Invested For Retirement Or Playing It Too Safe?

The steep uptick in 401k plan trades in reaction to the wild market swings over the last several weeks could be a precursor of a mass reallocation of participant portfolios to more conservative investments. We saw it during the 2008 crash and the summer slump of 2011 when investors fled the stock market en masse, with many remaining in cash or safer investments during the ensuing market recoveries. Even now, many 401k portfolios, especially those of investors closer to retirement, are heavily invested in bond and balanced funds. While that may lessen the sting of steep stock market decline, when applied through several market cycles of advances and declines, it is less likely to generate the long term returns necessary to build the amount of capital needed for lifetime income sufficiency.

As more plan sponsors take on the necessary responsibility of ensuring the retirement readiness of their plan participants by offering more financial education and advice, greater attention needs to be focused on the defects of behavioral investing which can lead to devastating mistakes by investors. When emotions drive investment decisions, it invariably leads to costly mistakes such as trying to time the market, chasing performance, or investing too conservatively. The retirement readiness of today’s employees hinges on their ability to avoid costly mistakes and apply the proven investment principles of discipline and patience in pursuing their long-term objectives.

Why Conservative Investing can be a Costly Mistake

The chart below illustrates the erosion of purchasing power on earnings generated from an investment in 10-year Treasury Bonds. The decade of 2000 – 2009 had one of the lowest rates of inflation, as measured by the Consumer Price Index, in the last 30 years, yet purchasing power on the earned income was reduced by 25 percent. It is important to note that the CPI, which is the official government measure of inflation, doesn’t include food and gas prices which have increased at rate three times the CPI over the last couple of years. If food and gas prices were included in the CPI, the rate of inflation would be closer to 9 percent, and, at that rate, the net purchasing power of earnings in ten years would be less than the initial investment, meaning you would have lost money.

                 Source: National Association of Realtors, Economistsoutlookblog.realtor.org

Investing your money in safe or guaranteed instruments may provide peace-of-mind that you won’t lose any money due to market fluctuations; however, each day that your returns fail to exceed the rate of inflation, you are, in effect, losing money, and that loss becomes more pronounced over time.

There are ways to invest conservatively that will minimize market risk, reduce portfolio value volatility and overcome the risk of inflation. The key is in knowing what your financial objective is in real terms, factoring in the true cost-of-living and taxation, in order to know the minimum rate of return you need to generate, and, therefore, the level of risk you need to incur. With an investment strategy tailored to your specific needs, you need not take any more risk than is absolutely necessary to achieve your objective. And even with that, a well-conceived investment strategy will incorporate methods to mitigate most of the risk. The investors’ job is to stay focused on their objective.

Plan Sponsors Need to Help Participants Keep their Eye on their Objective, not the Market

During difficult markets, plan sponsors must provide a constant stream of education and advice to remind their participants of the long term effects of going too conservative. With a better understanding of how the markets work and the historical performance of the markets, investors will find it easier to allow their discipline win out over their emotions. Even a thousand point drop in the market will amount to nothing more than a small blip in terms of them achieving their long-term objectives.

Source by: http://www.lifeincrs.com/blog/are-your-employee-invested-retirement-or-playing-it-too-safe