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| Your 401(k) Resource
November 2008 |
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Andrew Sweeny, Jr.
Vice President
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For more information about these topics, please contact
Andy Sweeny
at 513.745.0707.
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Greetings!:
Thank you for your continued business. If you know of anyone that could benefit from my services, please feel free to forward this newsletter on to them. |
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Risk Tolerance Questionnaires and
401(k) Plans
When you meet with an investment advisor or planner for the first time, the most important information he/she can gather is an understanding of your attitude and tolerance about risk. Filling out a risk tolerance questionnaire for an investment client is the first step in building an investment portfolio. Ethically, how can he recommend any investment to a client without this information? What happens in the 401(k) world with plan participants and their investments?
What should happen?
The answer should be the same. Sponsors and fiduciaries of 401(k) plans have an obligation to provide participants with the right type of investments needed to meet their retirement goals. Sponsors must take into account the good of all participants, not just what they feel is necessary for a few. The investment choices or options in a 401(k) plan should reflect the risk tolerance of your participants.
Risk Tolerance Questionnaires
The same ethical standard should apply to 401(k) plans and their participants; this same standard applies in the investment world where advisors are required to have understanding of an investor's risk tolerance before recommending any investments. Plan sponsors could make it mandatory that 401(k) plan participants have in their file a completed and signed risk tolerance questionnaire. This information will protect the plan sponsor as well as the participants. With these documents, plan sponsors can prove that they have taken the most basic step in educating your employees about their retirement plan investments. |
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Plan sponsor fiduciary protection aside, you would be providing an excellent service for the employees to help them understand their risk tolerance and how to make better decisions. The 401(k) plan needs to be treated as one of the employees' main savings and investment vehicles during their working career, because that is exactly what these plans are becoming.
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Perfect time to push 401(k) participation
Despite offering a host of resources to boost 401(k) participation, employers believe workers' failure to participate in defined contribution plans often stems from their efforts to pay other household bills, reports Aon Consulting Worldwide.
The HR consulting firm found that about 40% of companies with DC plans have less than 70% of their workers participating in the plans. Furthermore, 67% of employers said that workers don't take advantage of the plan because they can't afford the contributions.
Low participation rates, however, shouldn't let employers off the hook in providing 401(k) educational tools to workers. Employers should strive for 70% or higher employee participation rates. A mark of less than 70% indicates a poor plan, poor communication or both. During this economy, employers should emphasize the financial advantages of contributing to a 401(k) plan, such as being able to reduce federal income taxes and receive employer matching contributions. See full story, located at EmployeeBenefitnews.
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Is Your Defined-Contribution Plan Leaking? Very often 401(k) plans are referred to as nest eggs. For some plan participants, however, they are more like sieves-money flows in, but then flows right out the other end.
This issue recently was brought into the limelight with the controversy over 401(k) plan debit cards. These cards provide participants with easy access to 401(k) loans, and were dubbed a "gross distortion" of the intent of 401(k) plans at a July 2008 hearing by the Senate Special Committee on Aging.
Although 401(k) plan debit cards are not used widely, they do symbolize a valid concern: What is the point of increasing participation in 401(k) plans through automatic enrollment, automatic escalation and the like, if the monies simply leak out?
The reality is, though, when it comes to 401(k) plan leakage, loans may be a relative trickle.
What causes that trickle to become more of a torrent is what happens after employees leave their companies. Often, when this occurs, nearly half of them simply take their 401(k) assets in the form of cash.
Now consider that figures from the Department of Labor put the median job tenure for workers ages 25 to 34 at less than three years. This creates the specter of many people reaching their 40s with little retirement savings despite perhaps having actually participated in their defined-contribution plans for a number of years, thanks to being automatically enrolled. See full story, located at Workforce Management, to see what plan sponsors should be doing. |
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Pension Plan Limits For 2009
The Internal Revenue Service has announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires the Commissioner annually adjust these limits for cost-of-living increases.
Many of the pension plan limitations will change for 2009 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, for others, the limitation will remain unchanged. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $15,500 to $16,500. This limitation affects elective deferrals to Section 401(k) plans and to the federal government's Thrift Savings Plan, among other plans.
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Questions or Comments?
Do you have a question or topic you would like addressed in our next issue?
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Horan Securities, Inc., doing business since 1996.
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