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The Dangers in 401(k) Plan Auto-Enrollment

Do you understand the dangers in 401(k) plan auto-enrollment? Since permitted by the Pension Protection Act of 2006, most employers now auto-enroll new participants into their 401(k) plans. This process has produced some great results. The overall participation rate in 401(k)s has increased from about 50% to about 85%. About 90% of auto-enrolled participants stay in the plan and continue saving for retirement. However, there are two dangers to be aware of.  1. The most common auto-enrollment level is 3% of pay. This amount is too low to provide a great retirement outcome, but it can create a false sense of security. You must save more. 2. Some plans also include auto-increases, moving you up to 6% of pay over a few years. According to the Bureau of Labor Statistics, the median job tenure in the U.S. is 4.3 years for men and 4.0 years for women. We may hold up...
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Market Volatility and Sleeping at Night

The news reported that The Dow Jones Industrial Average “plunged’ 178 points yesterday. Should I be worried; should I change my 401(k) investments? Before you overreact and do damage to your asset allocation, consider the following: The normal volatility for this stock market benchmark for the last century has been 0.67% daily. On 5.1.19, this average was 26,590. A movement, up or down, of 178 points is a normal day for the Dow. Back on 1.1.99 the Dow was at 9,359, so a normal day’s movement would have been 63 points. Do not focus on the points gained or lost in an average, or the dollars gained or lost in your account. Always focus on the percentage change. A volatile day for the Dow is a movement of 1% of more. This happened 10 times in 2017 and 69 times in 2018. In some years, the stock market experiences much more...
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Mandatory Retirement Distributions Begin at age 70 1/2: Or else...!

  Is it true that all retirement plans and IRAs require that distributions begin at age 70 ½? What if I do not make a withdrawal? How much must I withdraw?   The short answer is yes; most people must begin withdrawing money from their retirement accounts when they reach age 70 ½. However, there are some exceptions, and for most people these rules are easy to follow.   Let’s start by remembering that retirement plans and IRAs are tax deferred investments, not tax forgiven! Not surprisingly, the IRS always intended to tax your retirement assets eventually. Beginning no later than the April 1st of the year following your attainment of age 70 ½, you must begin withdrawing the Required Minimum Distribution amount (called RMDs) each year. These withdrawals are mandatory. Failure to distribute the correct minimum amount will subject you to a 50% tax penalty on the undistributed portion. The...
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The Dangers of Conflicted Investment Advice

  Yesterday, the White House issued a report entitled “The Effects of Conflicted Investment Advice on Retirement Savings”. I recommend every retirement plan sponsor read this report. The report concludes that conflicted advice leads to lower returns, which can result in retirement account balances that are 12% lower at retirement age.   Current Department of Labor regulations require retirement plan sponsors to address the conflicted advice issue in their vendor and advisor hiring process. However, these responsibilities do not extend to the IRA rollover process. The decision to roll a retirement plan or 401(k) plan balance into an IRA is made by the current or former plan participant, who may be influenced by a broker who is not subject to the fiduciary standards applied to registered investment advisors.  Retirement plan sponsors are coming under more pressure, through regulation and litigation, to improve the performance of their investment line-up, and to lower...
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Are You Saving Enough For Retirement? What to Expect from Social Security

  Are You Saving Enough For Retirement?   What to Expect from Social Security   Your Social Security Benefits will replace a portion of the income you earned while working. The proper name for the monthly benefit you receive is the “Primary Insurance Amount”. The Social Security program was designed to be a social insurance program. The percentage of salary you receive depends on the level of your income (and the number of years you worked). As your income increases, the program determines you need less “insurance”; you are expected to provide for a larger share of your income in retirement. So your monthly benefit may be as high as 78.7% of your income, or as low as 28.2% of your income.   The below replacement ratios are based upon the Social Security 2012 Average Wage Index (AWI). In 2012 the average wage in the U.S. was $44,321.00. The Social Security...
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Deadlines for Starting a Retirement Plan

The rules for starting a retirement, profit sharing or 401(K) plan are different from the rules for opening an IRA. Several deadlines are looming. While IRA's can be opened as late as April 15th of the following year, retirement plans must generally be in place by December 31st. In addition, an employee's voluntary contributions to a 401(k) must be received by 12/31; not after the year ends as you can do with an IRA. Finally, a plan that incorporates any "Safe Harbor" design features also includes some 30 to 90 day advance notice requirements to the participants. If you are a business owner considering starting a retirement plan and making some tax deductible contributions for 2014, the time to act is now. Consider your objectives, your budget, and then hire an expert to help you navigate the rules and deadlines.
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