Retirement

Once a retirement savings plan has been approved and is in place, it’s tempting to sit back and adopt an “I’m done,” hands-off attitude. However, to ensure that a plan will continue to operate effectively, employers should periodically review plan provisions and features. Here are some points to check.

• How the plan is presented. The more convinced employees are of the wisdom of saving for retirement, the greater the level of employee participation. The greater the participation, the more the plan can benefit all employees — including highly compensated ones. Regular meetings, newsletters, and handouts are effective means of communicating plan advantages. Check to make sure printed materials are up to date and easy to understand, and distribute them frequently.
• Plan investments. Employers that sponsor participant-directed plans can limit potential legal liability for losses caused by employees’ investment decisions if plan investment choices meet certain requirements under Section 404(c). Very generally, where 404(c) protection is sought, a plan should offer at least three “core” investment choices, allow employees to switch investments at least once each quarter, and provide participants with adequate disclosure of specified investment information.
• Administration. Participants and beneficiaries must be given a copy of the Summary Plan Description (SPD) within 120 days after a plan is adopted or within 90 days after becoming eligible to participate in the plan or receive benefits. Review the SPD to make sure it accurately describes the provisions of your plan. If changes have been made to the plan document — which is likely, given the recent tax law changes — then all participants must receive a notification of these changes within 210 days after the end of the plan year in which the changes were adopted. Generally, all participants must receive a copy of the SPD every five years.
• Summary annual reports (SARs). Summary annual reports must be distributed to participants within nine months after the close of the plan year. If a plan receives an extension to file its annual report (Form 5500) with the IRS, then the SAR must be distributed within two months after the end of the extension.
• Plan rollovers. Qualified plans must allow a participant to elect direct rollover of any eligible distribution to an IRA or another employer-sponsored retirement plan. Your plan should have procedures in place to handle direct rollovers.
• Bonding. Generally, plan fiduciaries and others who handle the assets of a plan must be bonded. The bond must be equal to at least 10% of the funds handled by the bonded individual, but cannot be for less than $1,000 and need not be for more than $500,000.
• Loans to participants. Loans that are not properly administered may be treated as constructive distributions resulting in taxable income to the recipients. Review loans to make sure that loan balances do not exceed the maximum limitations. Unless used to finance the purchase of a principal residence, all loans must be repaid within five years. A plan may impose more stringent conditions on loans than the law requires.
• Plan forms. All forms should meet current requirements. Forms that may need updating include beneficiary designation forms, benefit election forms, and the notice of distribution options.

An employer’s 401(k) plan (or similar retirement plan) can be a good way for people to save for retirement. But what if your or your spouse’s employer doesn’t offer a retirement plan?

According to the U.S. Bureau of Labor Statistics,* 69% of private sector workers have access to a workplace retirement plan. Since most people don’t save for retirement outside of their workplace plans, often only one person in a dual-earner couple is saving. And while you probably want to save enough to maintain your preretirement standard of living, 401(k) plans are designed for individuals, which makes it difficult to save for two.

Plan Design

The specific design of a 401(k) plan is a main deciding factor in how much individuals contribute to their plans. Many plans offer auto-enrollment, where employees, upon eligibility, are automatically enrolled in their workplace retirement plan at a default contribution rate, which usually determines the rate at which employees save in their plans. Another feature in 401(k) plan design that influences contribution rates is the employer match. Employees may contribute at the rate necessary to receive the full employer match and often will increase their contribution amount to that rate, but they won’t go beyond it.

These plan design features are targeted to help individuals save and do not take a spouse into consideration. Therefore, if you have a non-saving spouse, you may need to reevaluate and increase your contribution amount.

Closing the Gap

Incorporating certain features in a 401(k) plan’s design could help employees save more. For example, marital status might be considered when setting default contribution rates. Another plan feature that may help is auto-escalation, or incrementally increasing plan contribution rates automatically over time. As with auto-enrollment, employees have the opportunity to opt out instead of opting in, making it more likely that they’ll just let it ride. Educating employees about the need to save more to cover a non-saving spouse is also important.

However, saving enough for retirement is ultimately an individual responsibility. What can you do to help ensure you’ll be able to retire comfortably? Here are a few tips:

• Set a savings goal. Your financial professional can help you determine a target amount based on your projected retirement income needs.
• Consider increasing your plan contribution. Look beyond your employer match to determine your contribution rate. Take advantage of features like auto-escalation while also evaluating how much you can increase your contributions on your own. Remember that although you may have only one retirement plan, your combined incomes may make increasing your contribution rate not only desirable but also affordable.
• Consider using a traditional or a Roth individual retirement account (IRA) to supplement savings in an employer plan. A married individual may contribute to a spousal IRA even with little or no direct earnings. Keep in mind that specific tax rules apply to different IRAs, so you may want to consult a tax professional before investing.
• If there’s a significant age gap between you and your spouse, plan for retirement with the younger spouse’s life expectancy in mind. You may have to adjust your asset allocations if you follow age-based guidelines, and you may need to scale back on withdrawals later on since you will likely have a longer combined retirement. On the other hand, if you and your spouse are close in age and are nearing retirement, you may want to consider staggering your retirement dates in order to keep saving in your plan a little longer.

Before taking any action, please consult with your tax and financial professionals.