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Content Highlights
A
Financial Warm-up
Your Savings
Fitness Dream
How's Your
Financial Fitness?
Avoiding
Financial Setbacks
Boost
Your Financial Performance
Strengthening
Your Fitness Plan
Personal Financial
Fitness
Maximizing
Your Workout Potential
Employer
Fitness Program
Financial Fitness for the Self-Employed
Staying On Track
A Lifetime of Financial Growth
A Workout Worth Doing
Resources
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Savings
Fitness:
A Guide To Your Money and Your Financial Future
 Employer
Fitness Program
Using Employer-Based
Retirement Plans
Does your employer provide
a retirement plan? If so, say retirement experts ... grab it! Employer-based
plans are the most effective way to save for your future. What's more,
you'll gain certain tax benefits. Employer-based plans come in one of
two varieties (some employers provide both): defined benefit and defined
contribution.
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How To Make The Most Of
A Defined Contribution Plan
- Study your employee handbook
and talk to your benefits administrator to see what plan is offered
and what its rules are. Read the summary plan description for
specifics. Plans must follow federal law, but they can still vary
widely in contribution limitations, investment options, employer
matches, and other features.
- Join as soon as you become
eligible.
- Put in the maximum amount
allowed.
- If you can't afford the maximum,
try to contribute enough to maximize any employer matching funds.
This is free money!
- Study carefully the menu of
investment choices. Some plans offer only a few choices, others
may offer hundreds. The more you know about the choices, investing,
and your investment goals, the more likely you will choose wisely.
- Many companies match employee
contributions with stock instead of cash. Financial experts often
recommend that you don't let your account get overloaded with
company stock, particularly if the account makes up most of your
retirement nest egg. Too much of a single stock increases risk.
- Plan fees and expenses reduce
the amount of retirement benefits you ultimately receive from
plans where you direct the investments. It's in your interest
to learn as much as you can about your plan's administrative fees,
investment fees, and service fees. Read
the plan documents carefully. For more information on fees, call
EBSA's
toll-free line at 866-444-EBSA (3272) and request the booklet
A
Look at 401(k) Plan Fees.
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Defined
Benefit Plans. These plans pay a lump sum upon retirement
or a guaranteed monthly benefit. The amount of payout is typically based
on a set formula, such as the number of years you have worked for the
employer times a percentage of your highest earnings on the job. Usually
the employer funds the plan - commonly called a pension plan-though in
some plans workers also contribute. Most defined benefit plans are insured
by the federal government.
Defined
Contribution Plans. The popular 401 (k) plan is one
type of defined contribution plan. Unlike a defined benefit plan, this
type of savings arrangement does not guarantee a specified amount for
retirement. Instead, the amount you have available in the plan to help
fund your retirement will depend on how long you participate in the plan,
how much is invested, and how well the investments do over the years.
The federal government does not guarantee how much you accumulate in your
account, but it does protect the account assets from misuse by the employer.
In the past 20 years, defined
contribution plans have become more common than traditional pension plans.
Employers fund some types of defined contribution plans, though the amount
of their contributions is not necessarily guaranteed.
Workers with a pension are
more likely to be covered by a defined contribution plan, usually a 401
(k) plan, rather than the traditional defined benefit plan. In many defined
contribution plans, you are offered a choice of investment options, and
you must decide where to invest your contributions. This shifts much of
the responsibility for retirement planning to workers. Thus, it is critical
that you choose to contribute to the plan once you become eligible (usually
after working full time for a minimum period) and that you choose your
investments wisely.
Tax
Breaks. Even though you typically are responsible
for funding a defined contribution plan, you receive important tax breaks.
The money you invest in the plan and the earnings on those contributions
are deferred from income tax until you withdraw the money (hopefully not
until retirement). Why is that important? Because postponing taxes on
what you earn allows your nest egg to grow faster. Remember the power
of compounding? The larger the amount you have to compound, the faster
it grows. Even after the withdrawals are taxed, you typically come out
ahead.
The tax deduction also means
that the decline in your take-home pay, because of your contribution,
won't be as large as you might think. For example, let's assume you are
thinking about putting $100 into retirement plan each month and that the
rate you pay on income taxes is 15 percent. If you don't put that $100
into a retirement plan, you'll pay $15 in taxes on it. If you put in $100,
you postpone the taxes. Thus, your $100 retirement plan contribution would
actually reduce your take-home pay by only $85. If you're in the 27 percent
tax bracket, the cost of the $100 contribution is only $73. This is like
buying your retirement at a discount.
Vesting
Rules. Any money you put into a retirement plan out
of your pay, and earnings on those contributions, always belong to you.
However, contrary to popular belief, employees don't always have immediate
access to the money their employer puts into their pension fund or their
defined contribution plan. Under some plans, such as a traditional pension
plan or a 401(k), you have to work for a certain number of years-say 5-before
you become "vested" and can receive benefits. Some plans vest
in stages. Other defined contribution plans, such as the SEP and the SIMPLE
IRA, vest immediately. You have access to the employer's contributions
the day the money is deposited. No employer can require you to work longer
than 7 years before you become vested in your pension benefit.
Be aware of the vesting rules
in your employer's plan.
Make sure you know when you're
vested. Changing jobs too quickly can mean losing part or all of your
pension plan benefits or, at the very least, your employer's matching
contributions.
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Retirement Planning For
Employees In Small Companies
Only about 2 out of every 10 small
employers with fewer than 100 employees offer some type of retirement
plan or pension to their employees. Many believe their workers prefer
higher salaries or other benefits, and they believe the rules are
too complex and the costs too high.
If you don't have a plan available
at work, encourage your employer to start one. Mention the following
benefits:
- A retirement plan can attract
and retain valued employees in a competitive labor market, as
well as motivate workers.
- Establishing a retirement
plan and encouraging employee participation can help employers
fund their own retirement. Even after taking into account the
cost of establishing an employee plan, employers may still be
better off than funding retirement on their own.
- Some plans cost less and have
fewer administrative hassles than employers may realize. Alternatives
to traditional defined benefit plans and the 401(k) include the
SIMPLE and the SEP.
For more information, contact
EBSA
at 1-866-444-3272 and request Savings
Incentive Match Plans for Employees of Small Employers,
Simplified
Employee Pensions: What Small Businesses Need to Know,
and Choosing
a Retirement Solution for Your Small Business.
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Retirement
Plan Rights. The federal
government regulates and monitors company retirement plans. The vast majority
of employers does an excellent job in complying with federal law. Unfortunately,
a small fraction doesn't. For 10 warning signs and other information on
protecting your pension rights, call EBSA's
toll-free number at 1-866-444-3272 and request the booklet Protect
Your Pension.
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