Which Retirement Plan Benefits Are You Missing Out On?

April 06, 2017

This week, we’re recognizing Employee Benefits Day on April 3rd by writing about ways to appreciate and “benefit from your benefits.” One of the most common benefits that is often underappreciated and underutilized is your employer’s retirement plan. In particular, here are some features that you may not be taking full advantage of if you’re fortunate enough to have them in your plan:

Employer’s match. According to our research, 92% of employees are contributing to their plan but almost a quarter aren’t contributing enough to get the full match from their employer. At the very least, make sure you’re contributing enough to not leaving any of this free money on the table.

Contribution rate escalator. If you can’t afford to save enough to hit your goal, try slowly increasing your contributions by one percentage point each year. This tends to be less than cost of living adjustments so people generally don’t even notice the difference in their paychecks, but after just a few years, they may be saving more than they ever thought they could. A contribution rate escalator can do this for you automatically.

Roth contributions. Unlike pre-tax contributions, you get no tax benefit now, but Roth contributions can grow to be tax-free after 5 years and age 59 ½. This is especially useful if you’re worried about paying higher tax rates in retirement or if you’re planning to retire early since tax-free Roth distributions won’t count against you in calculating the subsidies you would be eligible for if you purchase health insurance through the Affordable Care Act (assuming the subsides are still in place) before becoming eligible for Medicare at age 65. Roth contributions are also more valuable if you max out your contributions since $18k tax-free is more valuable than $18k that’s taxable. (Yes, you could technically invest the tax savings from making pre-tax contributions, but then you’d still have to pay a tax on those earnings too.)

After-tax contributions. If you max out your normal pre-tax and/or Roth contributions, you may be able to make additional after-tax contributions. These aren’t as advantageous since the money goes in after-tax and the earnings are taxed at distribution, but you can convert them into a Roth account to grow tax-free, either while you’re still at your job if the plan allows it or by rolling it into a Roth IRA after you leave. You can also generally withdraw after-tax money while still working at your job (subject to taxes and a 10% penalty on earnings before age 59 1/2).

Asset allocation funds. To simplify your investing, retirement plans will often provide you with fully-diversified asset allocation funds that can be a one-stop shop. Some, called target date funds, even automatically become more conservative as you get closer to the target date so you can simply “set it and forget it.”

Online retirement and investing advice. Some plans provide access to a free online retirement planning and investment tool that can tell you whether you’re on track for retirement and make specific investment recommendations based on your particular risk tolerance and time frame, typically using the lowest cost funds in your plan.

Brokerage window. If you’re looking for an investment not otherwise available in your plan, see if you have a brokerage option that will give you access to thousands of other funds and in some cases, even individual stocks.

Employer stock. While you don’t want to put too much in any one stock (no more than 10-15% of your overall), especially your employer’s, there can be a tax benefit for doing so when you eventually cash out the account. If you transfer the employer stock directly to a brokerage firm in-kind, you can pay a lower capital gains tax on the growth instead of the higher ordinary income tax rate that you would normally owe on distributions.

Retirement plan loans. If you need a loan, borrowing from your retirement plan doesn’t require a credit check and the interest goes back into your own account. However, you miss out on any earnings that money would have received and if you leave your employer, you may owe taxes plus possibly a 10% penalty (if you’re under age 59 ½) on any outstanding balance after 60 days. (Some plans do allow you to continue making loan payments though.) Also, be aware that retirement plan loans are paid back from your paycheck so there’s no possibility of default and you can’t discharge them through bankruptcy.

Financial wellness. Some plans offer free, unbiased financial wellness coaching to help you plan, save and invest for your retirement. This is an important benefit since it can help you take advantage of all the others.

Which of those benefits are you not taking advantage of? See which ones are offered by your plan and start utilizing them. Your future self will thank you.

 

 

 

Why a Lower Paying Job May Still Be Worth More

April 05, 2017

When looking at job opportunities, it can be easy to be wooed by increases in salary. I learned the hard way that it’s not the only thing that matters when I took a new job many years ago for a couple thousand more per year, only to find that my actual take-home pay was lower because my new employer didn’t offer the premium benefits I’d enjoyed at my first job. But how do you know which benefits are better than others?

While you can’t put a price on things like “dress for your day” or bring your dog to work policies, you can figure out how much a lot of benefits are actually worth to you, personally, in actual dollar amounts. I’ll use my own benefits as an example since Financial Finesse is a well-recognized employer of choice. Obviously you’ll have to use your own numbers according to the benefits available to you and who would be covered in your family, but here’s a good framework to start with:

Health insurance – Definitely find out what your premium would be to factor that in, but don’t only look at that, especially if the employer covers your costs like they do at Financial Finesse. Is there a high-deductible option that comes with a health savings account and does the employer make a deposit into that account on your behalf? That’s also part of your compensation. If I were comparing offers, I’d also want to know the maximum I’d be on the hook for with each health plan since coverage levels matter as well. It’s all well and good if your employer covers your premium, but that could seem irrelevant if any costs incurred would require you to spend $5,000 of your own money to hit your deductible before any coverage kicks in.

  • HSA deposit to my account for individual coverage: $1,500 (This also happens to be my deductible. If I had to pay a premium, I would subtract that amount from this to arrive at the net increase to my compensation.)

Retirement plan – Any match your employer gives you should be considered additional compensation, so definitely take that into account. Some employers even make discretionary deposits regardless of your own level of contribution, which should absolutely be accounted for when considering total pay. Financial Finesse basically matches me 4% as long as I contribute 5%, which is a no-brainer. Contributing less than 5% is the same as saying, “No thanks. I don’t want that extra bit of pay.”

  • Annual employer match: 4% of my eligible pay = over $3,000

Financial wellness benefit – Offering a workplace financial wellness benefit is becoming an increasingly common (and smart, if you ask me) way for employers to demonstrate their commitment to employee wellness. In fact, it can be a great resource in helping you to make the most of all your other benefits! How you quantify this benefit will depend on what’s offered. At Financial Finesse, all employees have access to calling our Financial Helpline, which is the equivalent of having a CERTIFIED FINANCIAL PLANNERTM professional on retainer. When I was an independent financial coach working with the general public, I charged clients $300 per quarter for a similar service. That meant they had unlimited access to call, email or meet with me as long as they paid that fee, similar to the Financial Helpline that many of our clients offer to their employees. If the offer you’re looking at includes an unlimited benefit like Financial Finesse, that’s the best way I know how to quantify it.

  • Annual savings by not having to hire a financial coach: $300 x 4 quarters = $1,200 (Note that this has nothing to do with what employers actually pay for their employees to have access to financial wellness but instead is what you’d have to pay if you sought an equivalent service on your own.)
  • Not included in this number: The financial benefit of using a financial wellness program to pay off debt, create a budget, increase savings for the future or invest appropriately along with reduced financial stress. Value: priceless

Professional development support – This depends heavily on your career field and any credentials you have to maintain but can be a real differentiator. I have three professional credentials that aren’t cheap to maintain on an annual basis. Financial Finesse supports all of them, but my last employer only supported part of them, which is a big difference to my wallet. Beyond that, each employee at Financial Finesse also has a $250 per year personal professional development budget to be spent on things related to enhancing their job function such as books, classes, conferences, and even role-specific consultants. For mine, I add up all my credential licensing fees, professional association dues, cost of continuing education and the professional development fund.

  • Annual savings by having my professional expenses reimbursed: about $1,750

Life insurance – Most employers offer employees automatic coverage of at least a year’s salary should the employee pass away while they are employed. The differentiator is when they cover more than that. Quantifying that truly depends on your personal situation. For some people, one times their annual salary is enough so additional coverage might not factor in as applicable compensation to consider. If you would need more coverage than the employer offers, you can figure out the savings based on what you pay for any additional policies you have outside of work.

  • Annual savings by having a portion of my needed life insurance covered: $50

To add it all up, I’m actually receiving at least $7,500 in benefits beyond my salary and insurance coverage – not too shabby!

There are plenty of other benefits to consider as well, depending on your personal situation and what you need. For example, your employer may offer discounted pet insurance, but that’s only applicable in your calculation if you’d switch your pet insurance over and get a discount. Another example would be pre-paid legal assistance, a benefit that’s really handy for people who need to draft estate planning documents or own rental property and need a little real estate legal advice but not as useful if you’re all set it those areas. This also doesn’t include the more typical benefits that the majority of employers provide like disability insurance, an EAP and obviously unemployment insurance. Since you’re likely to have those benefits at any place you work, they won’t really help in making a decision even though they are useful and important benefits to have and appreciate.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

How to Calculate the Value of Your Benefits

September 26, 2016

Are you overlooking the real value of your benefits when you think about your compensation? According to the Bureau of Labor Statistics, benefits accounted for 31.4 percent of employer paid compensation for U.S. workers  in June 2016, with salary making up the other 68.6 percent. It’s “open enrollment” season, the time of year when employees make decisions about their health insurance and other employee benefits for the upcoming year. While you’re weighing your options, it’s a good time to practice some benefits appreciation.  One way to do this is to estimate how much the benefits you choose are worth to you:

Health Insurance (typically $5,000 – $30,000)  – Your health insurance is a significant component of your benefits.  How can you value what your employer contributes for you and your family, as well as the discount you receive on coverage for participating in a large group plan? According to the 2016 Milliman Medical Index, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $25,826, with employers typically picking up 57% of the cost. That means that participation in their company sponsored health care plan is worth at least $14,721 for that typical family at the typical employer. Of course your insurance costs may be different, and your  employer may subsidize more or less of that.

More and more employers are also offering high deductible health plans in conjunction with a health savings account (HSA). In many cases, they’re contributing to the employee’s HSA as well. HSAs are a widely misunderstood and underrated benefit, and if you fully utilize your HSA, the long term tax advantages can be a benefit to you in retirement.

Retirement Plan (typically 3-6 percent of your salary in matching contributions) – While companies aren’t required to make matching contributions to what employees save for retirement, most companies with employer-sponsored 401(k) plans are offering this benefit. According to the Society for Human Resource Management (SHRM), 42% match employee contributions dollar for dollar up to a certain amount. 56 percent of companies require workers to save 6 percent or more in order to receive the full employer-matching contribution.

There’s also the value of having an employer-sponsored retirement plan in the first place. If you don’t have one as an employee, you won’t be able to save as much for retirement in tax-advantaged accounts. The consequence: employees without a work-sponsored retirement plan are far less likely to save for retirement. In fact, according to the National Institute on Retirement Security, 45% of working age households in the U.S. have zero retirement account savings.

Stock Purchase Plan (typically 10 to 15 percent of market value per share purchased) – In a typical stock purchase plan, the employer offers employees the opportunity, but not the  obligation, to purchase publicly traded company stock at a discount from the market value.

Disability Insurance ($2,000 to $5,000 per year) – Premiums for insurance that replaces a portion of your income if you can’t work due to a non-work related illness or injury can be paid for by the employer, employee or both. Purchasing this insurance as individual policies would be quite expensive. Group policies are much less expense per covered employee, so even if you’re paying some or all of the premiums yourself, you’re getting a good deal. That is if you have access at all. According to the Bureau of Labor statistics only 25 percent of U.S. employees have access to both short and long term disability insurance benefits through their employer.

Life Insurance ($250 to $500 per year) – Many large employers cover their employees with term life insurance at one times their annual salary. Supplemental term coverage is often available for a low, additional cost.

Employer Contribution to FICA (7.65 percent of salary) – What is FICA and why does it get so much money from my paycheck?! FICA stands for Federal Insurance Contribution Act, e.g., Social Security and Medicare, and your employer pays just as much as you do towards both programs.  The employer contribution adds up to total of 7.65 percent of your salary and bonus. When you are retired and draw Social Security and utilize Medicare for health insurance, know that your employers were partners in getting you there.

Unemployment Insurance (0.3 – 1.5 percent of salary) – Under the Federal Unemployment Tax Act (FUTA), employers pay your unemployment insurance, not you, as well as most states. If you lose your job through no fault of your own, and you meet your state’s requirements, you can file for unemployment benefits for some period of time (which varies by state). Like all types of catastrophic insurance, you hope you won’t have to file a claim – but it’s comforting to know that it’s there if you need it.

Other great benefits –  Your company may offer other benefits such as tuition reimbursement, pre-paid legal assistance, commuter benefits, health and wellness programs, access to group long term care insurance, etc. Before you make decisions during open enrollment, check and see if your company has a workplace financial wellness program. That is the benefit which helps you understand all your other benefits.

Do you have a question about workplace benefits? Please email me at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

 

What Should You Do With That Old Retirement Plan?

August 18, 2016

One of the questions I get from time to time on our financial helpline is what someone should do with their retirement plan when they leave a job. They often end up simply leaving the plan there, but that’s not always the best choice. Let’s look at the options:

Leave the money there. This is typically allowed as long as you have at least $5k in the plan. If you’re retired, you may be able to take periodic withdrawals. It’s the simplest choice because it requires no action from you.

Some good reasons to leave the money there are because you want to have access to a unique investment in the plan or you’d like to pay a lower tax on the appreciation of any employer stock in the plan when you eventually withdraw it. Otherwise, you’re probably better off rolling into another retirement plan to consolidate your accounts and provide you with more investment options. You’ll also have to take a required minimum distribution from each 401(k) and 403(b) you have at age 70 1/2 (unless you’re still working there).

Take the money and run. You can have them send you a check for the balance. However, you’ll have to pay taxes (plus potentially a 10% penalty if you’re under age 55 or if you’re under age 59 ½ and you left your employer before the year you turned 55) on it. If it’s a large enough distribution, that money could also put you in a higher tax bracket.

Roll it over. If you don’t want to leave the money behind or send a big check to Uncle Sam, rolling it into a new retirement account allows you to continue postponing the taxes on it. An IRA generally gives you more investment options while rolling it into your employer’s plan can allow you to consolidate your retirement accounts and possibly give you the option  of borrowing against it. If you change your mind, the money you roll into your employer’s plan can typically be rolled into an IRA and vice versa.

Turn it into guaranteed income. Some plans allow you to use your retirement plan balance to purchase an immediate income annuity at discounted rates (and hence you’d get higher payments) or even into a pension plan if you have one. This provides an income that you can’t outlive and avoids any early withdrawal penalties. The downside is that you generally give up the lump sum of money and should only be considered when you’re ready to retire.

Personally, I’d roll my 401(k) into my IRA if I were to leave Financial Finesse because I’d like to have more investment options. I also know people who prefer to keep things simple by rolling everything into their current employer’s plan. If you’re still not sure what to do, consider speaking to an unbiased financial professional.

 

The Hidden Downsides of a 401(k) Loan

July 21, 2016

I recently had a helpline call with a woman who was thinking about taking a loan from her 401(k) to pay a $32k condo assessment and avoid the 3.75% interest rate she would be charged if she made the payments over time. At first, the 401(k) loan looked like a great option. There’s no credit check, the fees and interest rate are minimal, and best of all, the interest would go back into her own account. However, there are also several hidden downsides of 401(k) loans to be aware of:

You lose out on any earnings. The stock market has averaged a 7-10% average annualized return over time. It’s easy to overlook this but it’s probably the biggest cost.

Your payments may be higher. Even if your interest rate is lower than the alternatives, your payments might actually be much higher than a credit card that will be paid off over 20-30 years. That’s because 401(k) loans generally have to be paid back within 5 years. The payments also generally come out of your paycheck so if you run into financial trouble, you don’t have the option to prioritize things like your mortgage and car payment. You also can’t eliminate a 401(k) loan through bankruptcy.

You may not be able to take another loan. This could be a problem if you don’t have an adequate emergency fund. In that case, you might want to borrow more than you need and put the extra money away someplace safe like a savings account or money market fund for a rainy day.

You may be subject to taxes and penalties if you leave your job. Any outstanding loan balance after about 60 days of leaving employment is typically considered a withdrawal. That means it’s subject to taxes and possibly a 10% penalty if you’re under age 59 ½.

You’re double-taxed on the interest. Even though the interest wasn’t paid pre-tax, it’s taxable when you eventually withdraw it. That means you’re essentially paying taxes twice on that money since you already paid taxes on it when you first earned it.

In this woman’s case, her employer’s policies provided a lot of advantages since she was able to take out up to 5 loans at a time and could continue making loan payments after leaving her job. However, we calculated that the taxes on the interest could easily add up to over $1,000 depending on the interest rate. As a result, she decided to use some of her emergency savings and reserve the 401(k) loan option for future emergencies.

If you’re considering a 401(k) loan, be aware of all the possible downsides. Make sure you also consider other options like peer-to-peer lending sites such as Lending Club and Prosper that allow you to borrow money from other people over the Internet, usually at lower rates than you can find at a bank. Finally, don’t forget that the real purpose of your 401(k) is retirement.

Don’t Leave Any Money On The Way Out

October 06, 2015

I was recently talking to a dear friend of mine who just lost her job due to a layoff. She was shell-shocked, scared and not sure what to do. As I listened to her talk about her plan, I asked her about her workplace benefits and she said that she got the package, saw no value in anything she had and was getting ready to throw the package away. Continue reading “Don’t Leave Any Money On The Way Out”

How To Determine Your Financial Priorities With A Late Start To Retirement

July 20, 2015

We hear a lot about the retirement crisis in America and there’s a great deal to be concerned about these days. With a decline in pension availability and concerns about the long-term viability of Social Security, the burden of saving for retirement rests squarely on our shoulders. However, the average American has less than $25,000 in total savings and investments for retirement (see EBRI’s 2015 Retirement Confidence Survey). Continue reading “How To Determine Your Financial Priorities With A Late Start To Retirement”

5 Retirement Plan Benefits You’re Probably Overlooking

July 02, 2015

One thing that I’ve noticed when speaking to HR executives and other employees about their benefits is that many valuable retirement plan benefits aren’t being taken advantage of. These benefits are part of your compensation so not utilizing them is like not taking your whole paycheck. Here are 5 in particular: Continue reading “5 Retirement Plan Benefits You’re Probably Overlooking”

Should You Take a Pension or a Lump Sum?

December 05, 2014

Within the past few weeks, I have had more than a few people ask about a prior employer offering a lump sum payout vs. leaving it in the plan and taking a monthly payout at a later date.I’m not sure if companies are making this “the lump sum season” intentionally or not, but there has been a major influx of conversations about this topic. I’m figuring for every person that is asking, there are probably many more sitting there silently and trying to make the decision on their own.  That sounds like a great reason to write a blog post.  Here is the process that I walk through with a person to help them evaluate their options when they have a lump sum opportunity. Continue reading “Should You Take a Pension or a Lump Sum?”

Money Tight? Make it Work Harder For You

March 11, 2013

Last year, employees got a break, a 2% bump in their take home pay, thanks to the payroll tax holiday enacted by President Obama to try to boost the economy in 2011- 2012.  The employees’ share of Social Security taxes were reduced from 6.2% to 4.2% for a time.  Like all good things, it came to an end and now employees are feeling the squeeze. Continue reading “Money Tight? Make it Work Harder For You”

7 Reasons NOT To Roll Your Retirement Plan into an IRA

August 30, 2012

Do you have a retirement plan from a former employer? Last week, I received two separate questions about what to do with a 401(k) from a previous job. Both times the person asking the question was thinking about moving it and both times they decided to leave it where it is after reviewing the pros and cons. Continue reading “7 Reasons NOT To Roll Your Retirement Plan into an IRA”

How to Turn Your Investment Lemons Into Lemonade in the Next Two Days

December 29, 2011

We usually wait until April 15th to worry about taxes, but the time to do something about them is mostly well before that. Some examples include contributing to your employer’s retirement plan and flexible spending accounts. But there is also one thing that you can do right now if you have investment losses outside of your retirement plan.(I know I do and if you have any taxable investments, you probably do too). Here’s how you can turn losses into extra cash on April 15th: Continue reading “How to Turn Your Investment Lemons Into Lemonade in the Next Two Days”

The Little Financial Engine That Could (But Only If You Use It)

November 17, 2011

I’ll let you in on a little secret from my days as a financial adviser. When you sit down with an adviser, they treat you really well, laugh at all your jokes (even if they’re not very funny), and ask you some questions about your current financial situation and goals for the future. Then they put all that information into a software program that calculates some projections, and may even make some recommendations. Guess what they do with that information? They charge you a fee for it or use it to sell you something. Continue reading “The Little Financial Engine That Could (But Only If You Use It)”

The Investment Strategy That Actually Made Money in 2008

October 06, 2011

Last week, I wrote about some common ways to diversify your investments and make sure you don’t get caught up following the herd into the vicious “greed, hope, and fear” cycle that can lead to buying high and selling low. But even if you followed one of those strategies, you still probably haven’t been too happy with your portfolio’s performance lately. Your “early retirement plan” may have started looking like the “never retirement plan.” Is there a way to earn that 8-10% average return without all that risk? Continue reading “The Investment Strategy That Actually Made Money in 2008”

Benefits Trends: Looking Back the Past 5 Years

August 09, 2011

Over the last 5 years, there has been great progress in the employee benefits arena for new employees entering the workforce.  Auto enrollment into a DC retirement plan has increased from 32% back in 2007 to 41% in 2011.  The number of companies offering the Roth 401(k) option has doubled since 2007, from 16% to 31%, and this feature usually is most beneficial to the younger workforce who most certainly may face higher tax brackets in the future.  And for those companies that offer high deductible health plans, 1 in 5 now offer an employer contribution, up from only 1 in 10 in 2007.  These are all positive movements highlighted in the 2011 SHRM Employee Benefits Study when looking back at the trends from 2007 to today. Continue reading “Benefits Trends: Looking Back the Past 5 Years”

Retirement Plan Enrollment: How to Get More Employees in the Game

July 26, 2011

Do you have a population of employees that are still on the sidelines regarding participating in your retirement plan?  According to a recent study by Aon Hewitt, 76% of eligible employees participated in their company’s DC plan in 2010, which means that almost 1 in 4 employees ARE NOT participating!  It just amazes me that even with the popularity of auto enrollment, there are still so many employees not taking advantage of saving for retirement. Continue reading “Retirement Plan Enrollment: How to Get More Employees in the Game”

“I Have a Pension? I Didn’t Realize That.”

May 17, 2011

Less than 1 in 5 workers today have a traditional pension these days, so those that do have a pension should be very appreciative, right?  Well, not if they aren’t even aware they have a pension!  I meet with thousands of employees each year who are fortunate enough to work for companies that still offer a company-funded pension, yet they don’t even know how lucky they are and don’t realize they are accruing a pension benefit for retirement by just coming in to work every day.  I’m sure when they were hired, their new employee handbook had details about the pension, and they may even get a yearly statement mailed to them, but do they really understand what it means to them? Continue reading ““I Have a Pension? I Didn’t Realize That.””

What the Navy Seals can Teach Us about Executing a Plan

May 06, 2011

The biggest news story all over the world right now is the U.S. Navy Seals Team Six’s mission into Osama bin Laden’s home.  This event has created an incredible amount of emotion across the globe and as of this writing, a controversy over publishing photos.  While I won’t go into a political discussion here or a religious one either, there are things that we can all take from this event and apply to our own lives. Continue reading “What the Navy Seals can Teach Us about Executing a Plan”