Archive for April, 2014

Happy retirement: Stop worrying about paying taxes.

Monday, April 28th, 2014

When you contribute to a Roth IRA you typically don’t have to worry about paying taxes on that money or its investment gains ever again. And employers are increasingly adding a Roth option to their 401(k) plans. Aon surveyed 400 employers covering 10 million employees in 2013 and found that half now offer a Roth 401(k) plan. Here are some of the benefits
of saving for retirement in a Roth account:

Having a tax-free account in addition to your pre-tax savings gives you more options to reduce taxes in retirement.
Tax complications don’t end when you leave the workforce. In fact, your taxes in retirement can actually be more complicated than in the years when you were working. For the most part, you’ll want to withdraw money you have in taxable and Roth accounts first and delay paying taxes on your savings in traditional retirement accounts as long as possible. But it’s also possible that you could pay significantly higher taxes if you delay too long and your traditional retirement account gets big enough for required minimum distributions to force you into a higher tax bracket. With money in different pots, you’ll have a chance to run different scenarios and maximize your after-tax retirement income.


Key questions (and answers) for Plan Sponsors

Monday, April 7th, 2014

Q: Is there a relationship between automatic enrollment and employer decisions about matching contributions and total compensation?

A: Recent research by the Center for Retirement Research at Boston College (CRR) found that auto-enrollment is related to relatively low employer match rates and default rates, but not overall compensation. The How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation? report indicates that auto-enrollment plans had a matching rate of about 0.4 percentage points less than plans without auto-enrollment, even taking into account other factors.

The researchers also investigated whether low-default contribution rates adopted by employers who have auto-enrollment in their plans. It appears that employers who have this feature may be using a relatively low default rate, with resulting lower matching, to offset the higher costs that occur from higher participation rates found in auto-enrollment plans. 
The study concluded that auto-enrollment increases saving for workers who would not have participated in the plan without that provision. However, employees who would have participated in the absence of auto-enrollment may, over time, save less because of relatively low employer match rates.