Benefits and beyond, c. 5 small employers.

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  • http://www.irs.gov/retirement/article/0,,id=111413,00.html
  • Benefits and beyond, c. 5 small employers.

    1. 1. Pensions- Small Employers Retirement Planning Thomas E. Murphy
    2. 2.  Internal fairness  Externally competitive  Positively affect participant behaviors  Cost effective and well-administered. 1 November 2010Thomas E. Murphy 2
    3. 3.  Some smaller employers cannot afford typical DBP, and even difficult to sponsor a DCP.  Too many legal compliance issues  Too much administrative expense  But, what about HR issues?  Why not use the Individual Retirement Account (IRA) as a tool to devise a more efficient employer sponsored plan? Thomas E. Murphy 31 November 2010
    4. 4. 1 November 2010Thomas E. Murphy 4
    5. 5. Thomas E. Murphy 51 November 2010
    6. 6. Not ordinarily related to employment How can employer use it?  Retirement account  Funded by individual  Investments directed by owner  Favorable tax treatment  But, there are limits on amounts that can be contributed and on earnings of owner  Very useful in “rollovers.”  Minimum distribution and early withdrawal limits apply  Roth IRA – after tax contributions.  Higher AGI limits Thomas E. Murphy 61 November 2010
    7. 7. IRA and Roth Application Regular: $5000 $6000 (after age 49) AGI - $53,000 (phased) Roth: $5000; $6000 (age 50) AGI: $101,000 (2010 – no limit) Can participate in ER plan.  Tax favored retirement account  Good vehicle for 401(k) or other “rollovers.”  In such cases, limits do not apply  Subject to age 70.5 RMD, and age 59.5 early distribution rules.  See IRS Rules on IRAs Thomas E. Murphy 71 November 2010
    8. 8. No discrimination testing! It’s Portable  Applicable to employers with no more than 100 employees.  Uses IRA as funding vehicle.  Limited administration.  Employee and Employer can contribute.  Employee directs investments of her choice.  Limit on employee contributions ($11,500).  100% immediate vesting.  Catch ups for over age 50 - $2500 Thomas E. Murphy 81 November 2010
    9. 9. Subject to 415 Limits *Savings Incentive Match for Employees of Small Employers  Employer must match 100% up to 3% of salary  Or, if no match, the employer must make a 2% of salary, non- elective contribution for everyone!  Employees making $5000 are eligible.  Cannot use SIMPLE if there is another DCP or DBP covering employees.  Elective deferrals and employer contributions must be made to a SIMPLE IRA, or a 401(k).  Distributions subject to Early Distribution (59.5) 1 November 2010Thomas E. Murphy 9
    10. 10. SIMPLE SEP KEOGH Money Purchase Plan Small employer plans Thomas E. Murphy 101 November 2010
    11. 11.  Employer (pre-tax) contributions only (after 1997). No employee income deferrals.  Contributions made to a SEP IRA  Maximum contributions (25%) w/ indexed cap - $49,000 for 2010.  Investments self-directed; all employees covered who make more than $550.  It is portable  Employer can elect not to contribute in a given year.  Testing is not a real issue. Why?  No catch ups Thomas E. Murphy 111 November 2010
    12. 12.  What about the Benefits Model?  The risk allocation?  Can be used by employers with more than 100 employees. 1 November 2010Thomas E. Murphy 12
    13. 13.  “Let’s get rid of the longevity and investment risk but still have it look like a DBP”  A Money Purchase Plan – a benefit is targeted but not guaranteed.  Employer contributions expressed as a percentage of pay are made to the fund.  Favorable tax treatment  Benefit is portable  Limits on contributions and other IRS rules Thomas E. Murphy 131 November 2010
    14. 14.  A DBP or DCP (Ind. 401k) typically for self-employed  Favorable tax treatment  Contribution limits based on percentage of earned income not compensation.  Age 59.5 and 70.5 limits apply  Can have a Money Purchase and Profit Sharing KEOGH.  Available to sole proprietorship or partnership  Must cover all over age 21.  Contribution limits of 20% of business income ($40 K) 1 November 2010Thomas E. Murphy 14
    15. 15.  Age of workforce  Competition – degree of  Industry  Labor intensity  Cost, margins, and price sensitivity of product or service  Affecting behaviors of employees  Financial flexibility  Simplicity of administration. Thomas E. Murphy 151 November 2010
    16. 16. 1 November 2010Thomas E. Murphy 16
    17. 17.  Migration from DBPs to DCPs  Will employees have sufficient income to retire? What about investment risk?  Will they outlive their retirement income?  What impact does migration have on employer HR succession strategy?  Use of early retirement incentives by employers seeking to reduce labor force. Thomas E. Murphy 171 November 2010
    18. 18.  See 5.1 at page 138 – Business Factors that affect type of plan to choose.  Retirement Planning – see pages 143-146.  See Table 5.2 (Review of Pension Plan Design Features) at page 149.  Safe Harbors: (1) Elective deferrals, employer matches 100% up to 3% of salary, and 50% up to 5% of salary. (2) Non-elective, company contribution of 1% of salary, and 2% after 5 years of service. Maximums covered by §415. 1 November 2010Thomas E. Murphy 18
    19. 19. Thomas E. Murphy 191 November 2010
    20. 20.  Move to jointly funded DBPs  Are DBPs inherently more efficient and cost effective?  DBPs rely on the investment expertise of professional money managers.  Should all benefits be distributed through an annuity? (See: www.immediateannuities.com )  Should we simplify all the various DCP approaches into one, retirement savings vehicle? Thomas E. Murphy 201 November 2010
    21. 21.  Are employers spending more on Safe Harbor 401(k)s? Would it be cheaper to simply offer a DBP?  Government “takeover” of 401(k) plans – or mandated IRAs for all?  Life cycle/more secure investment funds or a mixed bag?  Hybrid 401(k) plans – evolve assets into annuities.  What’s a DBK – a 401(k) with 1% “floor plan” DBP.  During the recession - government temporary rules on RMD, Safe Harbor, and Early Distribution rules Thomas E. Murphy 211 November 2010
    22. 22.  Should the government mandate annuities for all DCPs?  What are the pros and cons?  What risks would such a plan affect?  What new problems might arise? 1 November 2010Thomas E. Murphy 22 Can you go your own way alone?
    23. 23. Thomas E. Murphy 231 November 2010
    24. 24.  Aggregation, investments, and savings strategies will convert to disaggregation and spending strategies.  All the tax favored treatment will be converted to taxable treatment.  Try to minimize the impact of taxable treatment of distributions.  Life expectancy is a key element of the strategy here Thomas E. Murphy 241 November 2010
    25. 25. Shelter taxable investments The Rule of 3 (or 4)!  Investment strategies should take into consideration the rate of inflation.  The amount needed is not necessarily a percentage of final average pay – it relates to your expected expenses.  Have a balanced portfolio and keep it balanced.  Save aggressively.  Don’t “over stuff” your 401(k).  Timing is important!  Consider roll-overs of your 401(k) at retirement. Thomas E. Murphy 251 November 2010
    26. 26.  Exploit the tax implications of withdrawals  Consider buying an annuity to resolve the longevity risk  Use websites to calculate savings necessary for your retirement and best disaggregation strategies. Thomas E. Murphy 261 November 2010
    27. 27.  If you come up short, you may have to go back to work, or delay retirement.  You may have to “replant” yourself into something entirely different. 1 November 2010Thomas E. Murphy 27
    28. 28. 1 November 2010Thomas E. Murphy 28
    29. 29. See the Blog The Book - Exercises  Will Baby Boomers leave the market and cause a slump in “buys?” (Blog)  What about IBM’s 401(k)? (Blog at page 119)  Can we “benchmark” and compare 401(k)s? See: www.brightscope.com/  No. 3 (www.nmfn.com/)  No. 4 (www.wsharpe.com)  No. 6 (www.bloomberg.com - calculators  No. 13 http://www.choosetos ave.org/ballpark/ 1 November 2010Thomas E. Murphy 29
    30. 30. Thomas E. Murphy 301 November 2010
    31. 31.  At retirement age 65, would a 401(k) account of $1,000,000 be sufficient? What factors and calculations are relevant to answer this question? 1 November 2010Thomas E. Murphy 31
    32. 32.  “During those morning commutes, I secretly agonized over whether I had enough money socked away to be so casually employed. I was worried about the Number . . . What are the chances you will live out your days in comfort? What happens if you don’t make it to your Number?” Eisenberg, L., The Number (2006)  What’s your parents’ “number?” (Exercise No. 2 at page 150) Thomas E. Murphy 321 November 2010

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