An Update on 401(k) Plan Asset Allocations

Sixty-six percent of 401(k) assets were invested in stocks at year-end in 2014, according to a report by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI). Participants’ assets were invested in equity securities through equity funds, the equity portion of balanced funds, and company stock. Twenty-seven percent of assets were in fixed-income securities, such as stable-value investments, bond funds, and money funds. The reports also reveals the following:

  • More 401(k) plan participants held equities at year-end 2014 than before the financial market crisis (year-end 2007), and most had the majority of their accounts invested in equities. For example, about three-quarters of participants in their 20s had more than 80% of their 401(k) plan accounts invested in equities at year-end 2014, up from less than half of participants in their 20s at year-end 2007. More than 90% of 401(k) participants had at least some investment in equities at year-end 2014.
  • More than 70% of 401(k) plans included target-date funds in their investment lineup at year end 2014. At year-end 2014, 18% of the assets were invested in target-date funds, and 48% of 401(k) participants in the database held target-date funds. Also known as life cycle funds, these funds are designed to offer a diversified portfolio that automatically re-balances to be more focused on income over time.
  • A majority of new or recent hires invested their 401(k) assets in balanced funds, including target-date funds. For example, at year-end 2014, two-thirds of recently hired participants held balanced funds in their 401(k) plan accounts. Balanced funds comprised 42% of the account balances of recently hired 401(k) plan participants. A significant subset of that balanced fund category is invested in target-date funds. Thirty-five percent of the account balances of recently hired participants were invested in target-date funds.
  • 401(k) participants’ investments in company stock continued at historically low levels. Only 7% of 401(k) assets were invested in company stock at year-end 2014, the same share as in 2012 and 2013. This share has fallen by 63% since 1999 when company stock accounted for 19% of assets. Recently hired 401(k) participants are less likely to hold company stock. At year-end 2014, less than 30% of recently hired 401(k) plan participants in plans offering company stock held company stock, compared to about 44% of all 401(k) participants.
  • 401(k) participants were less slightly likely to have loans outstanding at year-end 2014 than at year-end 2013. At year-end 2014, 20% of all 401(k) participants who were eligible for loans had loans outstanding against their 401(k) plan accounts, down from 21% at year-end 2013, although up from 18% at year-end 2008. Loans outstanding amounted to 11% of the remaining account balance, on average, at year-end 2014, down 1% from year-end 2013. Nevertheless, loan amounts edged up a bit in 2014.
  • The year-end 2014 average 401(k) plan account balance in the database was 5.4% higher than the year before, but may not reflect the experience of typical 401(k) participants in 2014.
  • The average 401(k) plan account balance tends to increase with participant age and tenure. For example, participants in their 30s with more than two to five years of tenure had an average 401(k) plan account balance of close to $25,000, compared to an average 401(k) plan account balance of nearly $275,000 among participants in their 60s with more than 30 years of tenure.

Small Plan Participants Miss Out on Retirement Fund Investment Options

Small plan participants are missing out on investment options in their 401(k)s according to a Guardian survey. Plans for small businesses generally have fewer plan features, services, and investment options. Some of the major differences between small and large plans include the diversity of investment options, the ability to purchase stock in the company, and access to fixed-rate accounts. Also, small market participants are less knowledgeable and less engaged in their plans. According to the Guardian, this is particularly important since 401(k)s and other defined contribution plans are, by far, the largest anticipated source of retirement income for plan participants. The lack of options and services demonstrates an opportunity to enhance plan design and investment features available to small plan participants.

Douglas Dubitsky, vice president at Guardian Retirement Solution said, “Americans rely almost exclusively on their 401(k) accounts for their retirement income, so making access to a broad range of investment options and support for employees of every size company is critical for better retirement outcomes.”

Small and large plan participants don’t understand investment terms. Most participants have heard the terms “contribution rate” or “vesting” or have heard about loans from their accounts. But many don’t understand how they affect retirement planning. Small market participants generally have less access to support and appear to be less knowledgeable and therefore, less engaged in their plans. Guardian Retirement Solutions has developed the RetirementConnect education program.

Consumers Overlook HSA Investment Options

Investment options in health savings accounts (HSAs) are fairly new and not widely used, but they tend to draw larger contributions and have higher balances. In many cases, HSAs allow account owners to invest in mutual funds and other options, much like a 401(k) plan. So how are they working? A report by the Employee Benefits Research Institute finds the following:

  • In 2014, 6.4% of HSA owners used the investment option portion of the account.
  • People contributed $2,636 annually on average when they had investments and $1,224 when they did not have investments.
  • Annual distributions for health care claims averaged $1,777 from HSAs with investments, and $1,293 from HSAs without investments.
  • End-of-year account balances averaged $10,261 among HSAs with investments, and $1,709 in HSAs without them.

IRA Ownership Is Down, but Assets Are Up

While the share of families with an individual account retirement plan is ticking down, the assets in those plans are going up, according to a new analysis by the Employee Benefit Research Institute (EBRI). The percentage of families with an individual account retirement plan (such as a 401(k) plan or an individual retirement account (IRA) decreased from 53% in 2001 to 48% in 2013, based on the most recent data from the 2013 Survey of Consumer Finances, the Federal Reserve Board’s triennial survey of wealth.

While ownership of individual account retirement plans was declining, the median (mid-point) account balance of those families owning an individual account retirement plan increased: The value was $35,456 in 2001 and had reached $59,000 by 2013. “For many families, individual account retirement plan savings constitute most of whatever financial assets they have, said Looking at these accounts is key to understanding how well—or poorly—people are preparing for retirement,” Craig Copeland senior research associate at EBRI and author of the report.

Individual account retirement plan assets were a clear majority of their total financial assets: 70% in 2013 at the median, the same share as in 2010. Across all demographic groups, these assets accounted for at least 49% of median total financial assets (when these accounts were owned). For more information, visit www.ebri.org

Target-Date Funds to Dominate 401(k) Contributions

target401kTarget-date assets are expected to capture almost 90% of 401(k) contributions by 2019, according to research from Cerulli Associates. “The market for target-date funds is highly competitive given the industry’s expectations for future flows, and we anticipate that competition will intensify. Target-date funds captured nearly 40% of flows in 2013, and we expect this number to more than double before the end of the decade,” says Jessica Sclafani, senior analyst at Cerulli.

The Pension Protection Act of 2006, which created the concept of a qualified default investment alternative (QDIA), played a key role in increasing the use of target-date funds in DC plans. Target-date funds provide an ideal investment for DC plans due to their simplicity as a one-stop investment solution, coupled with a significant lack of engagement from participants, she said. The increased use of automatic features, such as auto-enrollment and auto-escalation, will also drive greater assets into target-date strategies. “Asset managers that do not have a proprietary target-date product will be forced to reevaluate their DC strategy, as the assets that are expected to amass in target-date strategies over the next several years cannot be ignored,” Sclafani explains. For more information, visit, www.cerulli.com.

Millennial Workers Not Saving Enough to Get Company Matching Contributions

Participation in 401(k) plans is strong among workers in their 20s and 30s, but many are not saving enough to take full advantage of their employer’s 401(k) match – potentially leaving thousands of dollars on the table and hurting their long-term financial health, according to a study by Aon Hewitt. While the average participation rate of young Millennial workers (age 20 to 29) is 73%- and 77% for older Millennials (age 30-39), many are saving at a low rate. Nearly 40% of 20 to 29 year olds and 31% of 30 to 39 year olds are saving at a level that is below the company match threshold.

Rob Austin, director of Retirement Research at Aon Hewitt said, “Automatic enrollment has significantly improved participation in 401(k) plans for all employees over the past 10 years—but even more so for young workers. However, once they’re in the plan, young workers seem to fall victim to inertia with many continuing to save only at the default rate, or slightly above, and risking their long-term savings by not receiving the full employer matching contributions that are offered.”

Leaving matching contributions on the table can cost young workers a significant amount of long-term savings. Consider a 25-year old worker who makes $30,000 annually and works for an employer that provides the typically company match – $1-for-$1 up to 6 percent. If that 25-year old starts saving the full match amount of 6% immediately upon employment and continues to do so until she reaches age 65, she’ll have more than $950,000 saved in her 401(k).  If that same worker waits until age 30 to begin saving 6%, she will have less than $715,000 saved at age 65. Five years of missed 401(K) contributions will cost the employee her $225,000 over her career. In order to make up the gap, she would need to increase her savings by 4% percent and start saving 10% of pay each year for the next 35 years.

“For young workers, it may seem insignificant to increase 401(k) contributions by a few percentage points, particularly at a point in their career and life when they’re likely earning a smaller salary, but the long-term effects can be remarkable,” explained Austin. “Employers can help Millennials improve their financial outlook by encouraging them to save at least at the match threshold through targeted communications and online tools and resources. To take it a step further, they can also increase the default contributions so that workers are saving at the match threshold immediately upon enrollment into the plan, or by offering automatic contribution escalation, which increases a workers’ contribution rate over time. The bottom line is young workers need to save more, starting now.” For more information, visit www.aonhewitt.com.

Most Employers Say Retirement Readiness Is a Big Issue

Retirement readiness has become a major issue for 78% of large and midsize U.S. employers that sponsor 401(k) and 403(b) defined contribution (DC) plans, according to a survey by Towers Watson. Additionally, 82% say retirement security will become a more important issue for employees in the next three years.

A vast majority of plan sponsors have taken steps to meet this growing challenge by boosting their savings and investment education programs and embracing automatic features and target-date funds for their DC plans. However, employers understand that more education is necessary. Only 12% say employees know how much they need for a secure retirement while only 20% say their employees feel comfortable making investment decisions.

Fifty-three percent are concerned about older workers delaying retirement. Robyn Credico of Towers Watson said, “With concern over retirement readiness at such high levels, many employers face the risk of having older workers delay retirement. These delayed retirements can weaken productivity, since employees who stay on the job because they cannot afford to retire are more likely to be less engaged and productive than other workers. To minimize this possibility, employers should measure the effectiveness of their plans in meeting retirement goals and, if necessary, determine opportunities where various design, investment and communication features can be used more effectively to optimize the overall program. These efforts will need to be balanced with the benefit plan cost constraints most employers have. Getting employees to understand their savings needs and feel comfortable about retirement remains a significant challenge. New plan features, alone, are not the answer. If employers are to make progress, they must also rely heavily on education and communication so their employees know their options and make informed savings decisions.”

The most common plan features include simple, but diverse investment lineups as well as automated enrollment and deferral features with flexibility for pre-tax and after-tax contributions. Fifty-four percent offer an automatic increase feature for participants’ contributions annually, but only 28% mandate it. Fifty-four percent offer an option to make Roth contributions, but less than 11% of their employees take advantage of these features.

The Health savings account (HSA) is another tax-efficient vehicle for retirement savings. Virtually all companies that offer HSAs and DC plans allocate the contributions separately. Of those that offer HSAs, only 19% educate their workers on the wealth accumulation benefits of a DC plan versus an HSA.

In support of more effective solutions, sponsors continue to simplify the investment offerings to align with participant needs. Sixty-six percent offer 10 to 19 investment options, and 86% use target-date funds as their default option. Sixty-one percent of employers focus their retirement education programs on traditional, passive methods, including account statements, newsletters, group meetings and online webcasts. Less than 10% use mobile apps extensively or have tried gamification, which uses game design to motivate employees to achieve savings goals

Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

TaxCredits2

By Leila Morris – Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2014 and years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and 401(k) plans and similar workplace retirement programs. Also known as the “retirement savings contributions credit,” the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2014 tax return. People have until April 15, 2015, to set up a new individual retirement arrangement or add money to an existing IRA for 2014. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, or the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2015 contributions soon so their employer can begin withholding them in January.
The following people can claim the saver’s credit:
• Married couples filing jointly with incomes up to $60,000 in 2014 or $61,000 in 2015.
• Heads of household with incomes up to $45,000 in 2014 or $45,750 in 2015.
• Married individuals filing separately and singles with incomes up to $30,000 in 2014 or $30,500 in 2015.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer’s credit amount is based on filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax year 2012, saver’s credits averaged $215 for joint filers, $165 for heads of household and $127 for single filers. The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn. Other special rules that apply to the saver’s credit include the following:
• Eligible taxpayers must be at least 18.
• Anyone who is claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2014, this rule applies to distributions received after 2011 and before the due date, including extensions, of the 2014 return. Form 8880 and its instructions have details on making this computation. More information about the credit is on IRS.gov.

401(K) Plans Put Retirement Readiness Within Reach

Americans who have access to 401(k) plans can achieve a more secure retirement if they start early and save consistently, according to new research sponsored by Prudential Financial. “This latest research shows if saving starts earlier and retirement occurs a few years later, the required savings rate becomes even more achievable,” says George Castineiras, senior vice president, Total Retirement Solutions at Prudential Retirement and one of the authors of the Prudential paper. For people with a workplace-based retirement plan an average of 35% of their retirement income should come from a 401(k) or other retirement savings plan. And the average required savings rate to achieve that level of targeted income is 14% — if savings starts at age 35 and retirement occurs at age 65.

“What’s particularly compelling is that this research helps to highlight the strength of the existing retirement system. Modern plan design allows individuals to get tax-advantaged savings and the ease of payroll deduction as well as investment education, advice and institutionally priced products,” said James McInnes, senior vice president of product management and development at Prudential Retirement, the paper’s co-author.  The research finds that the required savings rate for an average wage earner in a single income household drops from 15% to 10% if the individual starts saving at age 25, instead of age 35. When the target retirement age is changed to age 67 — the retirement age of Social Security for those born after 1959 — the average required savings rate (starting at age 35) is lowered from 15% to 12%. When the retirement age is further delayed to age 70, the average rate drops to 6%. If savings start at age 25 and retirement occurs at age 70, the required savings rate drops to 4%. For more information, visit prudential.com.

Professional Support Boosts Satisfaction of 401(k) Plans

401(k)supportSixty-one percent of plan sponsors who work with a financial professional are very satisfied with their 401(k) plan compared to only 40% of sponsors who don’t use a financial professional, according to a survey by Guardian. Ninety percent of plan sponsors consider their 401(k) to be successful when it helps them recruit and retain good employees, helps them offer competitive benefits, and helps them secure an adequate retirement income for their employees. About 90% of employers say that their 401(k) is successful in making retirement savings easier, providing planning tools, encouraging systematic savings, and helping employees fund a secure retirement.

Forty-six percent of small businesses surveyed did not offer a retirement plan, with many citing the potential expense as a deterrent. However, 58% said that they were interested in setting up a plan within the next three years. “This, coupled with the fact that nearly 30% of business owners did not know which type of plan was best suited for their company, illuminates the huge opportunities for financial professionals in the small-plan market,” said Douglas Dubitsky, vice president at Guardian Retirement Solutions.

While the majority of plan sponsors are satisfied with their retirement plans, underlying fees and expenses are major concerns. Additional concerns include the staff and executive time required to manage the plan along with the need to educate employees to manage their investments.
The study also reveals that small business owners are confused by their fiduciary roles and responsibilities with nearly one in five not satisfied with fiduciary support. Additionally, almost one-third of plan sponsors did not realize they were the plan fiduciary. Plan sponsors who work with financial professionals are more knowledgeable about plan requirements, including their fiduciary responsibilities. Those who work with financial professionals generally offer plans that are better designed and include more advanced features, such as an employer match, target date funds, and a managed account option. Small-plan sponsors are increasingly realizing the value of working with third-party support services and financial professionals for outsourced solutions that help save time and mitigate fiduciary risks. “This, and the fact that many non-sponsors are extremely confused by their options in the 401(k) market, reinforces what we have seen at Guardian for a long time — there are more and better opportunities for financial professionals in the small-plan retirement market than ever before,” he said. For more information, visit www.glic.com

Last Updated 09/22/2021

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