Tip of the Day: Wait! You forgot your 401(k)!

When an employee leaves, I know you must have your offboarding procedures: take their security card, give them a COBRA application, perhaps conduct an exit interview. But somewhere in those procedures, I beg of you to remind them to take their 401(k)s with them.

New research from Charles Schwab shows 43% of assets held by 401(k) participants who left their jobs in the first quarter of 2008 had not been moved a year later.

And no, there's nothing terribly wrong with that, but participants should be encouraged to be active and engaged about what they do with those savings. “We urge people to educate themselves on their options when they leave a job, especially if they expect to be out of work without access to a savings plan at a new job,” says Rene Kim, Charles Schwab senior vice president.

“In many cases, rolling an old 401(k) into an IRA can be a strategic move, because it is tax free, there is no penalty, and an IRA provides more investment choices,” Kim continues. “A rollover IRA can also keep retirement savings more top of mind. People who leave money in a previous employer’s 401(k) plan often forget the money is even there, which can result in asset allocations falling way off balance based on an individual’s savings objectives and risk tolerance.”

And while rolling savings into a new employer's plan also is a good move, Kim (and every other retirement expert on the planet0 strongly warns against cashing out.

“Unless there is a dire and immediate financial need, cashing out a 401(k) is almost always a bad idea,” Kim says. “Cashing out eliminates the power of compounding savings, and people generally find it very hard to get back on track once they begin tapping retirement savings for shorter term needs.”

Tip of the Day: Weighing the pros and cons of 401(k) loans, distributions

During the recession, more employees are taking tomorrow's savings to pay for today's needs -- taking 401(k) loans, hardship distributions or cashing out their plans altogether.

EBN legal eagle Frank Palmieri writes this month that while some employers seek to protect employees and only allow loans for limited purposes and others employers even restrict hardship distributions, it's important to understand the basic rules in making business decisions to allow or not allow such distributions. Click here to read his column.

Overheard @: "60 Minutes" segment profiles collapse of retirement dreams

Fairly or unfairly, the 401(k) is getting an awfully bad rap lately. Among the most recent jabs was from last Sunday's piece on "60 Minutes," which profiled tales of ordinary Americans who -- although traveling different career and financial paths -- met the same fate: unable to secure the retirement they'd dreamed of, due to retirement savings losses.

The segment also interviewed 401(k) heavyweights David Wray, president of the Profit Sharing/401k Council of America, and Brooks Hamilton, who helped design retirement plans for some of the country's largest corporations.

Wray, maintaining that the 401(k) is the best retirement vehicle the nation has, commented that the economic collapse and resulting stock market plunge that contributed to the massive 401(k) losses is "not a 401(k) problem. That is our entire investment system. In America, it's a society based on freedom and choice and personal responsibility. We need to help [investors] understand these responsibilities and execute them to the best they can. 401(k) is part of that. There are no guarantees."

Hamilton, who called the quality of mutual funds in 401(k)s "mediocre," also observed that 401(k)s were meant to be part of a three-legged stool that included Social Security and defined benefit plans. However, he noted, "The three-legged stool, if you will, has gone to two legs and it's wobbly."

Click here to view the entire segment and comment here as well as at the CBS News site with your thoughts.

Tip of the Day: Get target practice

It's ironic; thanks to the recession, target-date funds may have a bullseye on them. In EBN this month, one consultant said the funds' '08 performance was "like a bad Greek tragedy," and a high-profile senator recently teed up the funds for a closer look from lawmakers.

However, EBN contributors Bill Noyes and Steve Smith say the next generation of target-date funds hold promise through plan-specific solutions and, in a "Five Minutes With ..." podcast, Van Kampen Investments' Andrew Scherer outlines several ways for plan sponsors to assess and communicate target-date funds to get the best results for participants.

So, get to target practice, and let me know if you hit the bullseye.

Tip of the Day: 'Look before you leap'

As the recession drags on, more employers are reducing or eliminating their matching 401(k) contributions. A new report from Mercer, "Suspending the 401(k) match – Look before you leap," cautions employers to have a full understanding of the implications and potential pitfalls of taking this step.

“Distressed organizations may feel they lack sufficient time or resources to carefully consider the impact of contribution reductions or to evaluate alternative approaches. But the effort invested up front could save considerable time and expense later in dealing with unintended consequences,” says Bill McClain, Mercer retirement consultant.

“While the loss of one year’s employer contribution won’t have a huge impact on an employee’s retirement benefit, it could represent yet another incremental loss to an already-weakened benefit,” McClain observes. “Suspending contributions also results in a lost opportunity to purchase equities at historically low prices. These implications need to be weighed against the organization’s need to preserve capital.”

Companies should not lose sight of their longer-term business objectives, Mercer warns. “Many organizations will be better off identifying cost saving that will have only a minimal impact on those groups of employees that will be the most critical to helping them move forward once the economy improves.”

In addition, the regulatory implications of a match reduction or suspension can vary greatly from plan to plan. Employers maintaining an IRS safe harbor design are subject to specific rules or even restrictions on suspending or reducing contributions during the plan year. Other plan designs may offer more flexibility in terms of changing employer contributions, but even these plans must satisfy various regulatory requirements.

In particular, employers need to understand whether a plan amendment is required and whether that amendment raises any anti-cutback issues.

Plan sponsors should determine whether language in past employee communications could be interpreted as a promise to provide ongoing contributions. Organizations with collectively bargained or other employment agreements in place may be prevented from making company-wide changes to DC contributions.

Overheard @: Stand by your plan

Samuel Clemens wrote in 1897 “The report of my death was an exaggeration.” Hopefully, the same can be said about the death of the 401(k), writes former EBN Contributing Editor Richard Quinn in a web-exclusive commentary for BenefitNews.com.

Click here to read his detailed defense of the 401(k), then comment and share your thoughts.

Tip of the Day: Stable-value funds may not be so stable

Remember the days when employees sat down with their HR/benefits representative to decide which of the available investment funds you wanted to include in your 401(k) retirement portfolio?

EBN contributor Gary Mink does, waxing nostalgic in this month's issue about "one fund [that] looked like a sure thing — conservative and boring, but safe," aka stable-value funds.

However, as Mink observes, the current recession means that all bets are off about "sure things" — stable-value funds included. Read his tips for employers on performing due diligence to determine stable-value funds' risk.

News You Can Use: Boehner unveils retirement plan legislation

House Minority Leader John Boehner (R-Ohio) last week unveiled a plan to prop up the nation's struggling defined benefit and defined contribution retirement plan systems, and offer help to Americans in boosting retirement savings.

The 411 on the plan:
* Doubles the allowable smoothing of DB assets (from 10% to 20%) for two years.
* Raises catch-up contribution limints for 401(k)s and IRAs.
* Extends the suspension of minimum required distributions (currently through 2009) through 2012.
* Requires interest payments only for two years on 2008 DB plan losses and extends amortization of those losses from seven to nine years.
* Doubles the amount of income older workers may earn -- from $14,160 to $28,320 -- before having Social Security benefits reduced.

What do you think? Both the DC and DB systems have been on bleeding since last fall (and for DB plans, even before that). Will this plan help bandage up some of the wounds? Comment and let me know.

News You Can Use: Workers fear losing retirement savings

Employees aren't immune to the news reports of millions of Americans losing trillions of dollars in collective retirement income, and the news that increasing numbers of organizations are freezing their retirement plans, suspending matching contributions or both is heightening anxiety about their futures.

A new survey by Workplace Options finds that 59% of employees are concerned that money from their pensions and 401(k)s won't be there when they need it.

Dean Debnam, Workplace Options CEO says the worry causes a vicious cycle, as layoffs beget financial worries that decrease job performance and put employees in the line of fire for layoffs. "This, coupled with financial worries, can spell disaster for a worker's emotional and physical wellbeing, as well as overall productivity."

Even if your company is suspended its matching contributions -- which I strongly advise against -- or otherwise making retirement plan cutbacks, be sure to communicate with employees in a way that doesn't send them into a tailspin. Click here to listen to our podcast with communications expert Dennis Ackley and read the accompanying article, “Softening the blow of bad benefits news,” in the February EBN.

Tip of the Day: Five 401(k) fixes

The Wall Street Journal recently published a list of five ways to fix their 401(k). Easy at that, huh? Read it, and then comment on what tips would be on your list.

Here, I'll start: Create a family budget. This is pretty basic, but has helped my family tremendously. I suspect that many families -- like mine until recently -- don't really know where all of their money is going. Seeing it all in black and white helped us see where we could trim the fat to put toward saving.

News You Can Use: Target-date funds falter

Is any retirement vehicle safe? I keep looking, but all I see are returns that are the financial equivalent of auto crash tests where the dummy's body snaps all around then slumps over the wheel. Know what I mean?

Although target-date funds were supposed be set it and forgettable savings vehicles for employee-investors -- pick your dream retirement date and let the fund do the rest -- a recent Wall Street Journal report cites data from Morningstar that show that some 2010 funds have lost as much as 20%. Among other funds, Morningstar examined 275 of them, and found 50 posted more than 38.5% drops in 2008, including the Oppenheimer 2010 fund, that lost 41.3%.

Yikes.

Mark your calendar to check out an EBN report on 2010 funds in our March issue.

What has been your experience with target-date funds? Comment below.

Wish You Were Here: Kentucky bank bucks trend, increases 401(k) match

Finally some good 401(k) matching news right when we could use it. Not willing to follow the big boys down the road of cutting 401(k) matching contributions, Louisville-based Republic Bank not only has increased its 401(k) match, it has cut its vesting time to give employees matchung funds faster, PlanSponsor reports.

Chairman and CEO Steve Trager told the Louisville Courier-Journal said the shift was spurred by the bank's strong results last year (another departure from its larger counterparts). Republic will match 100% of employee 401(k) contributions, up from half, according to reports, and vest employees fully after two years rather than six.

Tip of the Day: White-knuckle your 401(k) match

In light of the economic recession and the news that big-name employers like GM, Sears, FedEx, Motorola and Starbucks have suspended 401(k) matching contributions, you may be tempted to keep the option as an open hole in your company's ever-tightening belt.

That, however, would be a mistake.

Why? For one, according to U.S. News, eliminating 401(k) matches may not even produce enough cost savings to impress shareholders/customers. Second, research cited in the same U.S. News article shows despite general investor inertia, companies that drop their match could see participation drop by 5 to 11 percentage points

Third, for employees who stay in the plan, "It's penalizing the folks who are doing the right thing (by) contributing to their retirement," Alec Dike, a senior financial counselor for Watson Wyatt, told USA Today. And fourth, move could scare off the very shareholders/customers you're seeking to calm, as Dike says, "it suggests you are in worse financial straits than you really are."

What are your thoughts? Is your company considering eliminating/already eliminated its 401(k) match? Why/why not? Comment below.

News You Can Use: 401(k) balances, savings rates drop

A Hewitt Associates analysis of 2.7 million U.S. employees reveals that the average 401(k) plan balance has dropped 14% in 2008 to $68,000, down from $79,000 in 2007. In the past two months alone, employees, on average, have lost nearly 18% of their 401(k) plan savings, and some have lost more than 30%.

In addition, savings rates have dropped marginally, from 8% in 2007 to 7.8% in 2008, while 4% of employees have stopped 401(k) plan contributions altogether.

Overheard At/Tip of the Day: Eight great tips to save for retirement

Dean Kohmann, vice president of 401(k)s for Charles Schwab, chatted with us last week to share details about a new survey about retirement habits. He offered eight tips to help employees get on track with their savings regimen. Tune in to the podcast, and find the tips written below in this exclusive "print for your employees" section.

1. Contribute to your company’s retirement plan up to the maximum employer match.

Even if money is tight, Schwab recommends that people contribute at least enough to their 401(k) or similar plan in order to get the full company match. “You are getting paid to save,” asserts Catherine Miller, vice president of investor development for Schwab. “Don’t leave money on the table.” Most 401(k) contributions are deducted from pre-tax income, so people keep more of their earnings each paycheck and savings grow tax-deferred until retirement.

2. Pay off nondeductible, high-interest-rate debt like credit cards.

Eliminating debt will make it much easier to reach your savings goals. To maximize savings, create a budget and look for ways to cut back on non-essential expenses. Use that extra money to make more than the minimum monthly payment on high interest credit cards or loans. You can also try negotiating with credit card companies for a lower interest rate.

3. Create an emergency fund to cover at least three months of essential living expenses.

Without an emergency fund, Americans are at risk of dipping into retirement savings or taking on more debt if they need quick access to cash. You should save enough to cover at least three months of essential living expenses like rent or mortgage, utilities, food and transportation. Keep your emergency fund in an account that’s easy to access like a checking or savings account.

4. Contribute the maximum allowed to tax-advantaged retirement accounts.

Now more than ever, you are responsible for ensuring your own financial security during retirement. The more money you set aside early, the more comfortable your retirement may be. Try to contribute up to the IRS maximum in your 401(k) plan at work (the new maximum will be $16,500 in 2009) and also contribute to a traditional or Roth Individual Retirement Account (IRA), if available to help supplement these savings.

5. Save for a child’s education.

As a general rule, Schwab recommends saving for retirement before your children’s college education. “Your child may be able to get a loan for college, but you can’t get one for retirement,” added Miller. A 529 college savings plan or a Coverdell Education Savings Account can help you take advantage of tax-deferred growth on your investment.

6. Save for the down payment on a home.

Start by estimating how much house you can afford. Typically, your mortgage payment, including principal, interest, taxes and insurance should not be more than 28 percent of your gross income. Make sure you keep your risk tolerance and timing needs in mind when deciding how to save for your down payment. Avoid using tax-deferred retirement accounts to fund this purchase.

7. Pay down tax-deductible, high-interest-rate debt like mortgages.

Reducing high-interest-rate debt from a tax-deductible mortgage, home equity or student loan can significantly enhance your ability to save in other areas over time. After taking care of other savings priorities, Schwab recommends you consider refinancing this kind of debt if interest rates have dropped. You may lower monthly payments in the near term and help save money over time, but make sure to factor in any transaction or closing costs before making a decision.

8. Keep investing.

If you’ve accomplished your other savings priorities, investing for the long term may be a good way to stay ahead of inflation and earn more than traditional savings accounts pay. Start by creating a realistic investing plan and put it into action to begin earning right away. Stay diversified with an asset allocation that matches your risk tolerance and keep long-term goals in mind to stay on track.

News You Can Use: Miller fights back

Rep. George Miller (D-Calif.), fighting back against what he calls "an active campaign that is blatantly misrepresenting Democratic efforts to preserve and strengthen Americans’ retirement security," on Friday issued a press release to tell his side of the story.

Despite news reports to the contrary, "I do not support ‘abolishing’ 401(k)s, moving these plans, or changing their tax status, plain and simple,” Miller said. Rather, he outlined five points to make 401(k)s more accessible and profitable for workers.

The December EBN outlines the controversial proposal that emerged at a hearing Miller last month, and the January will explore who proposed what when, and where the issue stands now.

News You Can Use: GM scraps 401(k) match, others likely to follow

Although a recent staff discussion at EBN headquarters questioned whether an automaker (with industry profits down more than 30% by some estimates) halting 401(k) contributions was a "big deal" -- since it comes as no surprise to our jaded ears -- here you have it:

General Motors last week announced it will freeze its 401(k) match in the company's ongoing effort to cut costs, and reports this week from Workforce Management show other large firms are likely to go the "monkey see, monkey do" route.

“We are in a very nasty situation that isn’t going to get better for some time and a lot of employers are going to be anxiously looking at how to reduce costs," Ted Benna, father of the 401(k) and knows of what he speaks, told the pub.

Tip of the Day

In a word, duck! A finger of blame may be pointing your way. A recent article in the Las Vegas Business Press reports that employees angry over their 401(k) losses from the stock market freefall will be "looking for someone to blame," and that someone may be employers.

Since we want to leave you with more of a tip today than "duck," read the full LVBP article on how to approach financial education for employees amid the economic downturn, and a recent EBA report on how HR/benefits pros are taking action to shield employees from greater financial pain through benefit programs.

News You Can Use: 401(k) changes a’comin’

Could be good news, bad news on the 401(k) front, as the IRS announced it’s raised the annual contribution limit from $15,500 to $16,500, but congressional lawmakers want to take the bull in a china shop approach to governing the plans, seeking to eliminate tax breaks for investors and mandating participation.

Scone: What about my money?

No matter your opinion on who’s to blame for the current financial crisis, the pending bailout legislation and which of the two presidential candidates can best lead us out of this economic turmoil, there is one issue I believe we all can agree on: We need to protect our retirement savings.

Your employees may have started asking you about the safety of their 401(k) assets, and if they haven’t, they likely soon will. I know that was my first consideration after the rollercoaster that has been the last week. No matter who got what in the bailout deal for Wall St., I wanted to know: What about my money?

I don’t even have a great deal of retirement savings accumulated in my 401(k), and I’m more than 30 years away from retirement. But knowing how important those assets will be to my financial future, my interest in the current stock market crisis was protecting my nest egg.

Your employees are no different, and they need to hear from you – right now – on how to take the appropriate steps to secure their retirement in terms of the new financial reality we’re faced with.

Now, I know the last thing employers want to do is tell someone how to manage their money -- for legal reasons, of course, as well as the fact that benefit managers may have the exact same questions as the people looking to them for guidance.

So, I encourage you to seek the counsel of your company’s 401(k) provider. Tell them it is paramount that they distribute new communications that address plan participants’ concerns, and make financial advisors available – ideally in person – to listen and answer questions.

If you can’t do that, at the very least view and distribute to employees this article and video from ABC News, anchored by the network’s personal finance expert Mellody Hobson. In addition to being contagiously upbeat and calming, Hobson lays out in plain English five key tips 401(k) participants “must know” about their accounts and how to manage them through this crisis. She also wrote a related piece on how people should handle their investments in general. They are both outstanding.

This is a delicate moment in our nation’s financial history. We all know that nationally, about 80% of eligible workers contribute to a 401(k), and those that do generally don’t contribute enough. Less than a majority of small businesses, although they employ a majority of the nation’s workforce, offer a retirement plan at all. And now, workers that do contribute are facing significant losses. Although these are difficult, and somewhat scary, economic times we find ourselves in, we cannot slide further behind in terms of retirement readiness. I urge you to do your part.

While history likely won’t note whether or not executives at the currently troubled firms received enormous golden parachutes, it will judge whether ordinary Americans were allowed to crash to the ground, armed without even the basic parachute of sound advice and guidance.