When your employer files for bankruptcy you should contact the plan administrator or your union representative (if you are represented by a union) to request an explanation of the status of your plan or benefits. Your summary plan description (SPD) will tell how to get in touch with the plan administrator.
Documents you might need include your summary plan description (SPD), a summary annual report (not available for some plans) that can contain names and addresses you may need, earnings and leave statements to help you establish your employment dates, compensation, and contributions to a plan, and individual benefit statements showing how much money is in your retirement account (for individual account plans) or the value of your pension benefit (for defined benefit plans).
Workers in bankruptcy situations face two important issues when it comes to their retirement benefits: access to pension benefits and the continued safety of their pension assets. Generally, your pension assets should not be at risk when a business declares bankruptcy because ERISA requires that promised pension benefits be adequately funded and that pension monies be kept separate from an employer’s business assets and held in trust or invested in an insurance contract. Thus, if an employer declares bankruptcy, the retirement funds should be secure from the company’s creditors. In addition, plan fiduciaries must comply with the ERISA provisions that prohibit the mismanagement and abuse of plan assets. If contributions to a plan have been withheld from your pay, you may want to confirm that the amounts deducted have been forwarded to the plan’s trust or insurance contract.
In addition, some pension benefits may be insured by the federal government. Defined benefit plans are protected by the Pension Benefit Guaranty Corporation(PBGC), a federal government corporation. If a plan is terminated because an employer has financial difficulty and cannot fund the plan, and the plan does not have enough money to pay the promised benefits, the PBGC will assume responsibility for the plan. The PBGC pays benefits after termination, up to a certain maximum guaranteed amount. On the other hand, defined contribution plans, such as 401(k) plans, are not insured by the PBGC.
In the event the pension plan is terminated, the plan must vest your accrued benefit 100 percent. This means that the plan owes you all the pension benefits that you have earned so far, even benefits you would have lost if you had voluntarily left your employment. You should review the summary plan description for the plan rules regarding payment of benefits. Also remember that taking a distribution of pension benefits before retirement may have important tax consequences. You may need to consult with a tax advisor before accepting the distribution.
You should contact the EBSA regional office nearest you if you are unable to obtain information or documents about your benefits, you suspect contributions deducted from your paycheck have not been deposited to the plan, or the assets are not prudently invested.
If your retirement plan is a defined benefit pension plan, all or a portion of the benefits may be insured by the Pension Benefit Guaranty Corporation (PBGC). For further information contact the Pension Benefit Guaranty Corporation, Administrative Review and Technology Assistance Department, 1200 K Street, NW, Washington DC 20005. The telephone number is (202) 326-4000.
More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
If you have an outstanding plan loan plan loan, the payments can be suspended for the entire period of leave with no maximum time limit. The length of the loan can also be extended to the maximum allowable length of the loan plus the period of military leave. Loan payments must resume when you return to work.
Essentially, all other plan functions are suspended until your return. When you return from military service, you are entitled to certain retirement benefits. Essentially, plans must recognize military service for benefit accrual and vesting purposes. A reemployed veteran will not suffer a break in service due to military service. Reemployed veterans are entitled to make up employee contributions over the period of time beginning at reemployment and continuing for three times the period of military service or five years, whichever is less. Employers must also make up all contributions that would have been allocated to the returning employee had he or she not left. This would include matching contributions (and other contributions contingent on employee contributions) if the employee chooses to make up missed employee contributions. These contributions need not include any gains and losses that would have occurred. In order to calculate such contributions, an employer can use either the “would be” compensation level of the individual or the average compensation for the 12 month period preceding the military leave.
USERRA rules can be quite complex. Please contact our offices for assistance with these rules. More information is also available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
Employees choose to contribute a certain dollar amount (or percentage) to their retirement account. These contributions are made directly from pay before federal and state income taxes are imposed. These contributions earn a pre-tax investment income, and a discretionary matching or profit sharing employer contributions may be made. Forfeitures from terminated employees can be added to the employee accounts or can be used by the employer to help defray the administration costs. A 401(k) plan has a high degree of flexibility in its design and can also include hardship withdrawals and participant loans, among other options.
- The plan is nonqualified and not subject to the same federal legislation as qualified plans
- Not all employees need to be included in the plan, and independent contractors may be included.
- Employee contribution limits are not combined with other plan contributions, allowing employees to contribute the maximum amount per year to BOTH a qualified plan and a 457 plan, doubling traditional contribution limits.
- There is no 10% early withdrawal penalty for employees who retire from service before reaching age 59 1/2.
Profit sharing contributions may be allocated to each participant in proportion to pay, integrated with the Social Security Wage Base, or weighted on age and/or service with the employer.
Plan administration is simplified: all plan assets are held in one trust; there is one plan document, one Summary Plan Description, one Form 5500 and one audit (if required at all); the plan is also not subject to nondiscrimination testing.
Key elements of this plan include:
-A 1% of final average pay for each year of service, up to 20 years
-An automatic enrollment feature with a 4% of pay employee contribution (unless the employee opts out)
-An employer match of at least 50% of employee deferrals, up to a maximum of 2% of pay
-This plan type is only available for employers with no more than 500 employees
In return, cash balance plans offer owners and partners significant tax reductions. Contributions to a cash balance plan can have the same financial impact as a deduction that reduces ordinary income dollar for dollar. Many businesses can benefit from a cash balance plan, and we recommend you speak with one of our plan design specialists to see if this plan type is right for you, especially if you:
- Are a partner or owner who wishes to contribute more than $45,000/year to retirement
- Are a partner or owner wanting to “catch up” or accelerate your retirement savings
- You already make 3% employee contributions
A vesting schedule can only apply to employer contributions and will never apply to safe harbor contributions.
There are several key advantages in utilizing an unbundled administrator, including:
- More flexibility. The sponsoring employer and participating employees may choose among any and all prudent investments when an unbundled approach is selected. Plan provisions may be individually designed to meet specific client objectives.
- Greater expertise and familiarity with IRS and DOL rules. Randall & Hurley is the only firm in the Inland Northwest to employ an ERISA attorney and several actuaries in-house.
- Lower, ascertainable costs. Unbundled third party administrative fees are determined separately from asset-based charges. Our fees are easy to understand and future charges may be projected with a high degree of certainty. This is different from “bundled” charges, where as plan assets grow, plan charges similarly increase and materially lower participant investment returns and fund accumulations over time.
- No conflicts of interest. Unbundled third party administrators remain independent of products and services (e.g., investments, insurance, internal audits) that may not be in the best interest to the client.
The IRS allows automatic enrollment if employees are sufficiently notified. Automatic enrollment can apply to current and future participants. This notice must include certain elements, be distributed annually and is best prepared by a TPA, like Randall & Hurley.
Automatic enrollment can increase participation levels and help employees save for retirement.
Pre-Tax Contributions. Pre-tax contributions are made before income taxes are deducted. Participants defer the payment of taxes until retirement (or until the account is withdrawn). Amounts are deposited within 5 business days and accumulate interest over time.
Catch Up Contributions.If a participant will be age 50 or older, he/she may make an additional pre-tax contribution, called a catch up contribution. (This provision became effective January 1, 2002 by way of the Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA).
After-Tax Contributions. Many plans allow employees to contribute to their plan accounts on an after-tax basis. These contributions have already been subject to federal income tax, and accrued earnings and are treated as part of your plan balance. When withdrawn, income taxes are not deducted from the amount (since the taxes were paid before the money entered the plan). After tax contributions are also called voluntary contributions.
Roth Contributions. Roth contributions allow participants to contribute money to the plan after it has been taxed, where contributions and earnings grow tax free. No taxes will be due at retirement, provided certain requirements are met: The distribution must be made after the 5 year period that starts with the first year a Roth contribution was made AND the participant is: (1) aged 59½ or older, (2) disabled, or (3) deceased.
If the assets are required to be distributed, as is the case in a plan termination, distributions can still be made without the participant’s consent, even when his or her vested balance is over $5,000, so long as the plan doesn’t offer an annuity option as a form of payout, the plan is not a money purchase or target benefit plan, there is no other employer plan, and there is no other plan among any employer of a controlled group to which the employer belongs.
If every effort has been made to locate the participant and the above criteria are met, the plan sponsor has the ability to distribute the participant’s account. In this case, every effort should be made to protect the participant’s benefit. This might mean withholding 100% of the distributable amount as federal income taxes, establishing an IRA in the participant’s name at a reputable financial institution, or forwarding the benefit amount to your state’s Unclaimed Property Department.
- the participant’s surviving spouse
- the participant’s children, including adopted children, per stirpes
- the participant’s surviving parents, in equal share
- the participant’s estate
Here are the six permitted events, along with our suggestions of appropriate supporting documentation for each item:
- Medical Expenses for Participant or Dependent. The participant should provide a copy of bill, along with an insurance company benefit statement denying coverage for at least the amount being requested. If the expense has not yet been incurred, you could require a signed letter from a doctor or other health care provider verifying the need for treatment and the approximate cost.
- Purchase of Principal Residence. The participant should provide a copy of the signed purchase agreement.
- Twelve Months Tuition and Related Costs. The participant should provide a bill or letter from the educational institution, verifying enrollment of the participant or his/her dependent and the estimated costs of tuition, room, board and related expenses.
- Payments to Prevent Eviction or Foreclosure. The participant should provide a copy of the formal legal document giving notice of the eviction or foreclosure. This notice typically states when the overdue rent or mortgage payment is in order to prevent eviction or foreclosure.
- Burial or Funeral Expenses. The participant should provide copies of the death certificate and the bill from the funeral home showing costs of the burial or funeral.
- Repair to Employee’s Principal Residence That Qualifies as a Casualty Deduction. The participant should provide evidence of the casualty (a description or photograph), a copy of the repair bill, and proof that insurance proceeds did not cover the amount of the casualty expense claimed as a hardship.
- have the ability to access documents furnished in electronic format at any location where the employee is reasonably expected to perform his/her duties, and
- are expected to have access to the employer’s electronic information system as an integral part of those duties.
Beneficiaries and other plan participants can consent to receive disclosures electronically, but the plan administrator must obtain written consent prior to electronically delivering ERISA disclosures to beneficiaries and other plan participants who do not have work-related access to a computer. The consent may be received in either electronic or paper form.
- each hour an employee is compensated or entitled to compensation by the employer for the performance of duties during the plan year
- each hour for which an employee is compensated for reasons other than performance of duties (called non-performance hours), such as vacation, holidays, sickness, incapacity (including disability), jury duty, lay-off, military duty or leave of absence
When reporting compensation you should review your plan document. Most plan documents, but not all, define compensation as W-2 compensation with the following adjustments: (1) add back in any salary deferrals (401(k), 125, 132(f), 403(b), SEP, 414(h) pickup and 457); and (2) exclude reimbursements or other expense allowances, fringe benefits, moving expenses, deferred compensation and welfare benefits. If you have employees who became eligible in the current plan year and your plan document excludes compensation prior to becoming eligible to participate in the plan, your plan consultant may ask you for partial year compensation for these participants.
The brochure is a good overview of the responsibilities of plan fiduciaries, including their duties to:
- Prudently select and monitor service providers
- Carefully evaluate the fees being charged to ensure that they are reasonable relative to the particular services and investments
- Inform participants of various aspects of the plan; for example, via the Summary Plan Description (SPD)
While the brochure is too basic for an experienced fiduciary, it provides a good starting point for new plan sponsors or retirement committee members to learn about the responsibilities of their job. In fact, in the brochure the Department of Labor notes that, “An employer… when using [a] committee, should educate committee members on their roles and responsibilities.” If your company does not have such a program in place, it should develop a fiduciary education program for its committee.
If you would like additional assistance or clarification regarding your role as a fiduciary, ask your plan consultant for assistance or contact a member of our Legal Department.
That being said, your retirement plan’s IRS Form 5500 is due on the last day of the seventh month following the end of the plan year, and that deadline can be extended for an additional two and one-half months. For plans ending on 12/31, this means your signed forms are due to the IRS no later than October 15th. In order for us to accurately complete your plan administration and prepare your return in a timely manner, your completed census information must be returned to your plan consultant no later than 9 months following the plan’s year end. For plan years ending on 12/31, your deadline is September 30th.
Investment platforms also structure their fees based on the services they may need to provide. When a TPA firm (like Randall & Hurley) performs those recordkeeping functions, they are reimbursed for those services. This is called sub-transfer agency fees (sub-TA fees).
If Randall & Hurley receives revenue sharing or sub-transfer agency fees on behalf of your plan, we credit your account dollar-for-dollar (after an annual monitoring fee). These amounts are applied to your account as credits and offset our fees. In some cases, this can account to significant fee reductions for our services.
The understanding and disclosure of fees is an important topic for plan fiduciaries. Please contact us for more information.
File the Form Electronically. You will need to obtain signing credentials in order to electronically sign the Form 5500 or Form 5500-SF by registering on the EFAST2 website. Once your Form 5500 has been prepared, you will receive an electronic notification from our system. Then, you will login to your plan account, electronically sign the form with your credentials and electronically submit the Form 5500 to the IRS.
Authorize Randall & Hurley to Submit the Form. In order to use this option, we must have specific, written authorization from the plan sponsor that authorizes us to submit the Form 5500. (Login to your account to access the Form 5500 Authorization.) You must also manually sign a paper copy of the completed Form 5500 or 5500-SF and return those pages to our offices, as we must include a PDF of those pages with the submission. (If you choose this option, be aware that your signatures will be available to view on the DOL website.)
All Form 5500 filings will be posted on the Department of Labor’s website within 90 days of receipt in order to satisfy the Pension Protection Act requirements.
When submitting a file using the File Upload link, a new window will appear with the name of the file and the confirmation, “File uploaded to server.” Your submitted file will be reviewed by our offices as soon as possible.
Both of these features are available after you login to your account.
In addition, by uploading your file to our website, you ensure that your file is formatted properly and correctly corresponds to your plan’s existing data. This will help us administer your plan in a timely manner and prevents delays in processing.
A summary plan description is distributed to potential plan participants, written in plain language, and summarizes the key components of the plan document, including advantages and disadvantages of the plan’s specific provisions.
You may also want to review what happens when plan documents differ from the SPD.
However, if you find that the two documents differ, you should immediately contact us to obtain an updated SPD. In the meantime, if you find that your SPD does differ, courts have consistently ruled that since the SPD is “the statutorily established means of informing participants of the terms of the plan and its benefits,” and the “employee’s primary source of information regarding employment benefits,” the SPD would take precedence over the plan document (Pierce v. Security Trust Life Insurance Co., 979 F2d 23 (4th Cir. 1992)).
Just because your spouse is typically the automatic beneficiary of your plan account doesn’t mean you shouldn’t complete a beneficiary designation form. This form also designates who is the contingent beneficiary (or beneficiaries), provided you outlive your spouse. It also requires you to provide information that would allow your employer to locate your spouse or contingent beneficiaries.
If you and your spouse would like to designate someone else to be the beneficiary of your plan account, your spouse must consent to the waiver of his/her benefit. You will need to have your spouse consent on the beneficiary designation form, and typically this consent must be notarized by a notary public or witnessed by a plan administrator. If you are in the Spokane area, Randall & Hurley has a notary public on staff for your convenience. Notary publics can also be found at most banking institutions.
Of course, if you are not married, you must select a beneficiary in the event of your death. Be aware, however, that if you do marry, your spouse will automatically become the beneficiary of your account, regardless of who is listed on your beneficiary designation form. (That is, of course, unless your spouse has consented to waive his/her benefit, as described above.) More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
The IRS has ruled that, if employees are sufficiently notified of the plan’s automatic enrollment procedures, automatic enrollment is treated the same as if the employee were given the choice to make pre-tax contributions to the plan. The notice to employees must describe the automatic enrollment feature of the plan; the employee’s right to elect not to contribute to the plan (or to contribute at a different rate than the automatic enrollment default deferral rate); and the procedures for requesting a deferral rate change. This notice must be distributed annually and can apply to existing and future participants, with proper notice.
Employees must also have a reasonable period of time to make a change prior to the default percentage taking effect, and the plan must allow employees the ability to make future changes to their deferral percentages, including the suspension of all deferrals under the plan. More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
Pre-Tax Contributions. Pre-tax contributions are, as the name implies, made before income taxes are deducted from your paycheck. Thus, you defer the payment of taxes until retirement (or the withdrawal of your account). The amount must be deposited directly to your retirement account within 5 business days, and it accumulates interest over time. The amount you contribute on a pre-tax basis is limited to a particular dollar amount each year.
Catch Up Contributions. If you will be age 50 or older, you may contribute an additional amount on a pre-tax basis. This type of contribution is called a catch up contribution. In mid-October, the IRS will announce the amount of catch up contributions allowed for the coming year. this number is based on the cost of living increase for the prior year.
Roth Contributions. Roth contributions allow employees to contribute money that has already been taxed into an employer-sponsored retirement account where contributions and earnings will grow tax free. No taxes will be due at retirement, provided certain requirements are met. These requirements are that the distribution must be made after the 5 year period that starts with the first year a Roth contribution was made AND the distribution is: (1) made on or after the date you reach age 59½, (2) made because you are disabled, or (3) made to a beneficiary or to your estate after your death.
After-Tax Contributions. Although not as common as pre-tax contributions, many plans allow employees to contribute to their plan accounts on an after-tax basis. These contributions have already been subject to federal income tax, but once deposited in your plan account, these funds accrue earnings and are treated as part of your plan balance. When withdrawn, income taxes are not deducted from the amount (since the taxes were paid before the money entered the plan). After tax contributions are also called voluntary contributions.
More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Profit Sharing Contributions. Typically, a company will tie contributions of this type to company profits, but not always. The amount of the contribution is usually determined annually. It may be based on a total dollar amount the company wishes to pay, i.e., $50,000, and allocated proportionately, or it may be based on a percentage of each employee’s pay, i.e., 4% of eligible compensation. The profit sharing contributions can be paid by the employer in a lump sum contribution or paid throughout the plan year. The company almost always reserves the right to not make a profit sharing contribution in any given year.
It may seem like there is too much leeway about when and how much contribution a company can make, but these contributions are strictly monitored to ensure compliance with federal pension laws. A contribution can be allocated in many different ways, e.g., by age, by compensation, etc. If you are unsure of the allocation formula, you should consult your plan document or contact your plan administrator.
Matching Contributions. When matching contributions are made, they are always directly tied to the amount participants contribute. The specific formula an employer utilizes will be set forth in your plan document. Typically, these formulas follow a tiered percentage of pay. For example, the company will contribute 100% of your contributions, i.e., one dollar for every dollar you contribute, up to 2% of your compensation; then, if you contribute more than 2% of eligible compensation, the company may contribute 50% of your contributions up to 5% of your pay.
Matching contributions are generally deposited into your account at the same time your contributions are deposited. This should be within 5-7 business days from the date the funds were withheld from your paycheck.
Mandatory Employer Contributions. Certain kinds of plans, such as money purchase pension plans, require an employer to contribute a certain fixed amount or a fixed percentage of pay to each employee’s account. These contributions are not optional and are usually contributed on an annual basis.
Safe Harbor Contributions. Some employers adopt safe harbor plans or make safe harbor contributions. These are special contributions made by the employer, which are not discretionary. Safe harbor contributions can be structured either as safe harbor matching contributions or safe harbor non-elective contributions.
For an employee, one of the biggest advantages of a safe harbor contribution (versus other employer contributions) is that it is not subject to a vesting schedule, nor is it subject to service or hour requirements. In other words, all eligible participants will receive a contribution, regardless of how many hours were worked in the plan year. Employers usually make safe harbor contributions in order to pass discrimination tests.
The IRS requires employers to give a safe harbor notice to each eligible participant 30 days prior to the beginning of the plan year in which safe harbor contributions will (or may) be given. In addition to the required safe harbor contributions, employers can make additional non-safe harbor contributions that are subject to vesting.
More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
A vesting schedule can only apply to employer contributions, and will never apply to any safe harbor contributions made by the employer or any contributions made by you.
More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Your account balance also grows rapidly if you start investing early. By making contributions well in advance of your retirement, your account accrues interest for a longer period of time. This little difference, called compound interest, can significantly increase your account balance over time.
The graph shows what you can expect to accumulate if your investments give you a return of 8.5% annually.
A third way that your retirement savings can grow more rapidly than traditional savings accounts is through employer contributions. Any contribution your employer makes to your retirement account each year also increases your retirement savings in a way that is completely impossible under a personal savings account.
Contributions to your retirement plan can also reduce your taxes. Your contributions are typically withdrawn from your salary before any taxes are calculated or deducted, reducing your taxable income. If you make $30,000 per year, are in the 15% income tax bracket and you contribute $1,000 toward retirement each year, you would save $150 in taxes AND you would see only a $70.83 reduction in your monthly income because of these tax savings! Thus, your $1,000 contribution “costs” you only $850!
More information is also available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
There are typically penalties and rules that restrict withdrawals from these accounts, just as there are in qualified retirement plans. However, these penalties may be waived under certain conditions. There are also special rules that limit the amount that may be contributed to an IRA if you or your spouse are covered by an employer’s retirement program. If you are considering utilizing an IRA, you should consult a tax advisor or trained professional associated with an institution that offers IRAs. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
How you allocate your funds is called your investment elections or asset allocations. Asset allocation determines the investment returns you achieve because different fund options typically react differently to changes in the financial markets and to broader economic conditions. For example, a market that produces strong stock returns may cause bond returns to slump, and vice versa. When you spread your investments across several different fund options, you diversify your account holdings, and you may be able to limit, or offset, potential losses in one asset class with stable values, or even gains, in another.
There are two key factors that can help you make the right allocation choices for you as an individual investor: your risk tolerance and your investment horizon. When you consider which options to include in your retirement portfolio, you must decide how comfortable you are with financial risk. Essentially, riskier fund options outperform more stable fund options, but there is a greater tendency for high risk fund options to move from periods of high investment returns to periods of great investment loss. If you are not comfortable experiencing such fluctuating performance, or if you are nearing retirement, your risk tolerance may be much smaller.
You’ll also need to consider how much time you have until retirement. This is called your investment horizon. Those with longer investment horizons should invest differently than those who will retire shortly; time allows an account to take advantage of compound interest. Also, if your retirement account takes a dip, you have more time to allow your funds to return to higher levels. In a sense, time provides a cushion against market fluctuation. Those with shorter investment horizons should consider fund options that are more stable so that your account does not decrease dramatically just as you are planning to use the funds for retirement.
Remember that as your life situation changes, your tolerance for risk will probably also change, and you should consider adjusting your asset allocation.
We recommend that you work with your plan’s financial professional to determine an initial allocation model and refine it as time goes by. Please note that Randall & Hurley, Inc. can not provide investment advice.
Once you understand this, you can find the right balance of risk and reward to help meet your long-term goals. First, you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can’t cut out all risk. The goal instead is to find an appropriate balance-one that generates some profit but still allows you to sleep at night.
Everyone handles risk differently. That’s because some people can live with, or can afford to take, more risk than others. Risk tolerance is based on a mix of subjective traits and objective circumstances. Your personal risk tolerance could be influenced by current world events, your own investment experiences, and your inherited views on saving and investing. The younger you are, the more investment risk you generally can afford to take. That’s because you have the time to wait for a rebound when there is a downturn in the market. But if you’ve retired or are nearing retirement, you may be counting on income from your investments. That increases the likelihood that you’ll want to avoid the risk of losing principal even if you make yourself more vulnerable to inflation risk.
Your life situation also plays a role in how much risk you are willing to take. Those with children going to college soon or those who care for aging parents or those who wish to start a business may all have a different risk tolerance due to the circumstances in their lives.
Your personality matters, too. There’s no way around the fact that most investments will drop in value at some point. That’s what risk is all about. But most experts agree that it’s counterproductive to make investments that either make you so nervous you can’t sleep or mean you’ll sell in panic at the first sign of a downturn. But if you’re uncomfortable with all risk, you should learn more about the long-term rewards of well-planned risk-taking.
You can balance risk and return in your overall portfolio by making investments along the entire spectrum of risk, from the most to the least. Diversifying your portfolio in this way means that some of your investments have the potential to provide strong returns while others ensure that part of your principal is secure.
We recommend that you work with your plan’s financial professional to determine your risk/return tolerance and investments appropriate within that spectrum. Please note that Randall & Hurley, Inc. can not provide investment advice.
When you invest early, your account grows increasingly larger. This is called compound interest. (Albert Einstein once called compound interest “the greatest mathematical discovery of all time.”) In simple terms, when you invest money, you earn interest on the principal. The next time, you’ll earn interest on the principal and the interest from the first period. Then, you’ll earn interest on the principal and the first two period’s interest, and on and on. It may not seem like a lot, but over time, it’s quite significant.
For instance, if you contribute $50 per month in an investment that earns 5% interest (a modest return by retirement standards), you’ll have a total balance of $614 at the end of one year. After 10 years, you’ll have $7,764. But after 40 years, you’ll have $76,301! (You’ll have contributed $24,000 and earned from interest $52,301.)
So, making contributions well in advance of your retirement allows your account to accrue interest for a longer period of time.
We recommend that you work with your plan’s financial professional to monitor your account performance. Please note that Randall & Hurley, Inc. can not provide investment advice.
There are typically penalties and rules that restrict withdrawals from these accounts, just as there are in qualified retirement plans. However, these penalties may be waived under certain conditions. There are also special rules that limit the amount that may be contributed to an IRA if you or your spouse are covered by an employer’s retirement program. If you are considering utilizing an IRA, you should consult a tax advisor or trained professional associated with an institution that offers IRAs. More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
Bull Market. A bull market refers to a market that is rising faster than the historical average. It is characterized by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country’s economy is strong and employment levels are high. (The bull market gets its name from the way a bull attacks its predators. The bull will drive its horns up into the air.)
In a bull market, we usually see strong demand for securities. In other words, many investors want to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available shares. Investors usually feel good about where the market is headed, confident that they will make a profit. In a bull market, people have more money to spend and are willing to spend it, which strengthens the economy and drives stock prices upward.
Bear Market. A bear market refers to a market where prices are falling. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue in the long run, which (ironically) perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers. (The bear market gets its name from the way a bear attacks its predators. The bear will swipe its paws downwards upon its prey.)
In a bear market, we usually see more people wishing to sell their stocks than to buy them. The demand is significantly lower than supply, and share prices drop as a result. Market sentiment is negative, and investors begin to move money out of equities and into fixed-income securities. A bear market is also associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough.
Long Term Stock Market Health. Even though market returns may rise and fall a number of times throughout your lifetime, it is important to note that long-term investing has produced positive returns. For instance, since March 31, 1900, the Dow Jones Industrial Average has had an annual average return of at least 8%! This figure includes returns during the stock market crash and depression of the late 20’s and early 30’s.
We recommend that you work with your plan’s financial professional to monitor your account performance. Please note that Randall & Hurley, Inc. can not provide investment advice.
However, some plans have a provision which allows employees over age 59½ to withdraw a certain amount from their accounts. Typically, the plan has a minimum withdrawal amount of $1,000, but you should check your plan document to be sure. If you take an in-service withdrawal, the amount will be considered taxable income during the year you receive the distribution, and you will be responsible for federal (and any state) income taxes on this amount. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Financial hardship withdrawals are allowed for the following reasons:
(1) to purchase your principal residence;
(2) to prevent foreclosure or eviction from your home;
(3) to pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months;
(4) unreimbursed medical expenses for you or your dependents. Plan sponsors may choose to allow hardship withdrawals for a limited number of the circumstances listed here.
If you are under age 59½ when you receive the withdrawal, it will be subject to a 10% early withdrawal penalty, that will be paid to the IRS when you file your taxes. You may be able to qualify for a penalty-free withdrawal if you:
(1) become totally disabled;
(2) are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income;
(3) are required by court order to give the money to your divorced spouse, a child, or a dependent;
(4) are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later;
(5) are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. Special rules apply during these circumstances, and you should consult with your plan administrator and tax advisor.
No matter how old you are or what your circumstances are, your withdrawal will certainly be counted as taxable income during the year you receive the distribution, and you will be responsible for federal (and any state) income taxes on this amount. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Total Distribution Amount. You are typically able to withdraw 100% of your vested plan account balance. This would include all of the money you have contributed to the plan. Employer-contributed money held in your account is typically subject to some type of vesting schedule, based on the number of years you have worked with your employer. On your account statement, you should see two figures, “account balance” and “vested account balance.” Your vested account balance is how much you would be eligible to withdraw.
If you have an outstanding plan loan, the amount of money eligible for withdrawal would be calculated differently. Again, you would start with your vested account balance. However, you will need to subtract the total outstanding loan amount (since you already received this money). You will, however, be liable for income taxes on the outstanding loan amount. For more information, see our section on participant plan loans.
Qualifying Circumstances. In order to qualify for a termination distribution, you must have the intention of permanently severing your employment relationship. Examples include quitting, being fired, being laid off and disability. Examples of severance options that do not qualify you for a termination distribution include short-term disability, maternity or paternity leave, division transfers and temporary lay-offs.
Distribution Types and Consequences. There are four different options typically available to plan participants when receiving a distribution:
(1) a qualified joint and survivor annuity;
(2) a lump-sum distribution directly to the participant;
(3) a rollover to either a new retirement plan or an IRA;
(4) a combination of these options. Depending on plan provisions, some of these options may not be available to you.
A joint and survivor annuity is probably the least common option available for most plan participants and, if offered, is typically restricted to those with over $5,000 in the account. An annuity is a periodic and fixed payment for the life of the participant, with a periodic and fixed payment (equal to anywhere from 50% to 100%) for the life of the participant’s spouse. Typically, taxes are paid only on the amount distributed each year, and a 10% early withdrawal penalty (paid to the IRS) may apply if the participant is less than 59½ years of age.
In the case of a lump-sum distribution directly to the participant, the participant will receive his/her account balance, less any fees and outstanding loans, in a cash distribution. The gross amount of your distribution (including any outstanding loans) will be considered taxable income in the year in which it is distributed. You will be liable for federal (and any state) income taxes. If your account balance is over $200, the IRS requires that 20% of your account balance be withheld (and remitted to the IRS) for federal income taxes. (When you file your income taxes, you may owe more or receive a refund of part of this amount.) Additionally, if you are under age 59½, the IRS will impose a 10% early withdrawal fee on your gross distribution. You will be responsible for this amount when you file your income taxes. (There are a few, very limited exceptions to the early withdrawal penalty, the most common of which is a distribution made to an “employee after separation from service after attainment of age 55.”)
To avoid federal (and state) income tax liability, as well as the 10% early withdrawal penalty, participants can “rollover” their plan balance to another employer-sponsored plan or to an IRA. You will need to contact the plan administrator of the plan you wish to transfer the money to ensure they will accept the funds. The receiving plan must be of the same plan type (e.g., you cannot roll money from a defined benefit plan to a 401(k) plan). If you do not have an employer-sponsored retirement program that will accept your rollover, and you still wish to avoid income tax liability, you may rollover your plan account into an IRA. You should consult a tax advisor or trained professional associated with an institution that offers IRAs to be ensure the right type of IRA is set up to accept your funds.
In most cases, you are able to split your account among several of these options. For instance, you may choose to take a partial lump-sum distribution and a partial rollover, leaving you with a portion of the account balance (and taxes and penalties) and placing the rest in a rollover IRA.
Doing Nothing. If your account balance is under $1,000, many employers opt to “force out” participants so they are not responsible for the administrative fees that accompany the maintenance of these accounts. So, if you do not make a decision about what to do with your account, chances are you could receive a lump-sum payment made directly to you. You will be responsible for income taxes and the early withdrawal penalty.
If your account balance is between $1,000 and $5,000 and you do not make an election, the employer has several options which vary from plan to plan. Your employer may choose to “force out” the account balance, as described above; leave the account balance in the plan; or transfer the account to an IRA. The action taken on your account is stated in the plan’s administrative procedures. You should consult your plan administrator to find out which option will be taken if you do not make a decision.
If your account balance is over $5,000, the employer is required to leave your account in the plan, with few exceptions (such as a plan termination). However, you may be charged a reasonable administrative fee to help defray the costs of maintaining this account. More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
Death. Any distributions made from your retirement account after your death are not subject to the early withdrawal penalty, even if made to a beneficiary under age 59½, so long as the account is still in your name when the distribution occurs. If your spouse is the beneficiary of your account, he/she can receive the death benefit in the form of a lump-sum distribution paid directly to him/her OR he/she can rollover the distribution to an IRA. Other beneficiaries can only receive the death benefit in the form of a lump-sum distribution paid directly to the beneficiary.
To calculate the amount of your RMD, all you need is your current age, your ending account balance for the previous year and the life expectancy factors found in the IRS Uniform Lifetime Table. To determine your RMD, divide your account balance by the IRS life expectancy factor corresponding to your age in the table. However, if you’ve named your spouse as the only beneficiary on your account and he or she is more than 10 years younger than you, then you need to use the joint life expectancy factors in the IRS Joint Life and Last Survivor Expectancy Table to calculate your annual distributions. (This calculation can be complicated, and Randall & Hurley, Inc. will prepare this amount for you each year, if you are participating in a retirement program administered by us.) Of course, you may request to receive more than the minimum amount in any given year.
Once you receive the distribution, you are responsible for the income taxes on that account. You can also elect to have a particular amount deducted from your RMD and withheld for income taxes. You may not roll your RMD into another tax-deferred account, like an IRA. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
To qualify as a QDRO, all of the following criteria must be met:
(1) The instrument must be a judgment, decree, or order of a court (including an approval of a property settlement agreement) that
(a) relates to the provision of child support, alimony payments, and marital property rights of your spouse, child, or other dependent and
(b) is made pursuant to your state domestic relations law, including a community property law.
(2) The domestic relations order must create or recognize the existence of an alternate payee’s right to receive, or it must assign to an alternate payee the right to receive, all or a portion of the benefits payable to you or payable on your behalf; the term alternate payee means your former spouse, child, or other dependent who is recognized by the order as having a right to receive all or part of your benefits under the plan.
The QDRO must not:
(1) require the plan to provide any type of benefit or any option not otherwise provided for in the plan;
(2) require the plan to provide more benefits (determined on the basis of actuarial value) to the alternate payee than you would be entitled to require the plan to pay one alternate payee benefits that are required to be paid to another alternate payee under another order previously determined to be a QDRO.
The QDRO must clearly specify all of the following information:
(1) your name and last known address and the name and mailing address of each alternate payee covered by the order;
(2) the amount or percentage of your benefits to be paid by the plan to each alternate payee or the manner in which such amount or percentage is to be determined;
(3) the number of payments or the period to which the order applies; and
(4) the name of each plan covered by the order.
A plan administrator is required to determine whether a domestic relations order is a QDRO within a reasonable time after the receipt of the order and is required to notify you and each alternate payee of the determination. Every plan is required to have written procedures for making these determinations, and these written procedures should be available to you.
In addition, Randall & Hurley has a compliance department.
If it has been several years since your employment has ended, you may estimate this date, as your previous employer will have already provided this information to us.
When you receive a distribution packet by mail from our offices, this Notice will be included with your packet. The Special Tax Notice is also available when you request a distribution online. Or, you can view the Special Tax Notice now. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Once you borrow against your account, you will be required to make payments back to your account through payroll deduction. You must repay the loan within a five year period (although this can be extended for a home purchase). Although the money for the loan has been withdrawn from your account, it is still counted as part of your plan assets, as a sort of liability. However, if you were to terminate employment, your distribution would be decreased by the amount of an outstanding loan.
Advantages. While plan loans, like other distributions prior to retirement, should be minimized, there are several advantages in applying for a plan loan versus a traditional bank loan. A plan loan is convenient. There is no credit check or long credit application form. Some plans only require you to make a phone call, while others require a short loan form. ( Plans may also require a spousal consent.) The interest rate is relatively low and set by the plan, typically one percentage point above the prime rate. (The current prime rate can be found in the business section of your local newspaper or the Wall Street Journal.) And the interest you do pay is paid to your retirement account, not to the bank or credit card company.
Disadvantages. There are also some serious drawbacks to receiving a participant loan, and these should be given much consideration. Since the interest rate paid on a plan loan is often less than the rate the plan funds would have otherwise earned, you miss out the added growth to your account. Often, because you now have a loan payment, you may reduce the amount you are contributing to the plan and further reduce your long-term retirement account balance. Interest paid on the loan is not tax deductible, even if you borrow to purchase your primary residence, and you have no flexibility in changing the payment terms of your loan. There are also one-time set up fees and annual maintenance fees required to administer your loan. Also, you are “double taxed” on your loan amount; you are taxed on the amount of your loan when you eventually withdraw the funds (at retirement or termination of employment) and, since your loan repayments are made on an after-tax basis, you are taxed as you repay the loan balance. Finally, you should consider the possibility of defaulting on your loan, which causes serious financial consequences. If an employee quits or is terminated, the loan must be repaid in full, normally within sixty days. Should the plan participant fail to meet the deadline, a default would be declared and penalties and taxes assessed. (For a full discussion on loan defaults, please see the Loan Defaults section below.)
It is generally accepted that you probably shouldn’t take a plan loan if situations where you are planning to leave your job within the next couple of years; there is a chance you will lose your job due to a company restructuring; you are nearing retirement; you can obtain the funds from other sources; you can’t continue to make regular contributions to your plan and pay your loan; you can’t pay off the loan right away if you are laid off or change jobs; you need the loan to meet everyday living expenses; or if you want the money to purchase some luxury item or pay for a vacation.
Credit Reporting. Loans from your retirement plan, even in the case of a loan default, are not reported to credit-reporting agencies, and will not negatively impact your credit rating. But if you are applying for a mortgage, lenders will ask you if you have such loans and they will count the loan as debt.
Plans are not required to let former employee take plan loans and few allow them to do so. More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
In most cases, you are able to make additional payments to the loan principal. There are special procedures for this, so please contact us or your plan administrator for more information.
Military Service. In the case of military leave, a plan may permit loan repayments to be suspended for the entire period of the leave with no maximum time limit. (Typically, the maximum suspension length is only one year.) The length of the loan may be extended to the maximum permissible term for the loan (usually five years) plus the period of military leave.
When the participant returns, loan payments must resume. The plan may permit the participant to resume paying the same dollar amount with a “balloon” payment of the balance due at the end of the loan term, or increase the payment amount by reamortizing the balance due over the remaining loan term. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
If the participant had another plan loan in the last 12 month period, they will be limited to 50% of their vested account balance, or $50,000, minus the outstanding loan balance in the preceding 12-month period, whichever is less. Be aware that most employers limit the number of loans a participant may have outstanding at any one time. More information is available in your Summary Plan Description. Login to your account to view this document or contact your employer for a copy.
This will also affect the distribution of your entire plan balance, in that you will be taxed and amounts will be withheld for the full value of your account, but your net distribution will be reduced by your outstanding loan balance. In rare circumstances, some employers allow new employees to rollover loan balances from a prior retirement program. However, a loan cannot be rolled into an IRA.
When your loan defaults, you will receive a Form 1099-R which will show you the exact amount to report. (A copy of this form is submitted to the IRS.) You should receive this form by January 31st following the year in which your distribution occurs. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.
Fees and expenses paid by your plan may substantially reduce the growth in your account. (Be aware that your employer also has specific legal obligations to consider the fees and expenses paid by your plan.) Plan fees and expenses generally fall into three categories:
Plan Administration Fees. The day-to-day operation of a retirement plan involves expenses for basic administrative services, such as plan record keeping, accounting, legal and trustee services, that are necessary for administering the plan as a whole. Today a retirement plan may also offer a host of additional services, such as phone systems, access to customer service representatives, educational seminars, retirement planning software, investment advice, online access to plan information, daily valuation and online transactions.
In a bundled approach, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. In an unbundled approach, administrative costs are charged separately. These fees will be paid directly by your employer or charged against the assets of the plan. When paid directly from plan assets, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Either way, generally the more services provided, the higher the fees.
Individual Service Fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a retirement plan. Individual service fees are charged separately to the accounts of individuals who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.
Investment Fees. By far the largest component of plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent.
There are three basic types of fees that may be charged in connection with investment options in a retirement plan. These fees, which can be referred to by different names, include:
Sales charges (also known as loads or commissions). These are basically transaction costs for the buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.
Management fees (also known as investment advisory fees or account maintenance fees). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.
Other fees. This category covers services, such as record keeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.
Mutual funds also may charge what are known as Rule 12b-1 fees, which are ongoing fees paid out of fund assets. Rule 12b-1 fees may be used to pay commissions to brokers and other salespeople, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers to a 401(k) plan pursuant to a bundled services arrangement. They are usually between 0.25 percent and 1.00 percent of assets annually.
More Information. If you have questions about the fees and expenses charged to your plan account, contact your plan administrator. You can also find out if expenses and fees are paid by your plan or by your employer by consulting your summary plan description.
When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs. Remember that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available investment options.
There are also requirements on the content of the notice, including the reason for the blackout, a description of the rights affected, the expected ending date and contact information for the plan administrator.
The Sarbanes-Oxley Act also places restrictions on the activities of directors or executive officers during blackout periods, prohibiting them from dealing in employer securities both directly and indirectly. These prohibitions generally do not apply to small, privately held companies. Exceptions are also made for prearranged transactions and transactions outside the officer’s control, such as dividend reinvestments, stock splits, acquisitions via gifts, wills, or domestic relations orders, and similar transactions. Violators are subject to SEC enforcement and may be sued by the issuer or shareholders for the difference between the amount involved on the date of the transaction and the amount which would have been received after the blackout period.
You will be responsible for all federal (and state) income taxes owed on any distributions taken from your retirement account. You will only be taxed on the amount withdrawn in any given year, not the entire account balance (unless you take a distribution of the entire balance). If you have more questions regarding distributions at retirement, please contact us or consult with a financial advisor. Remember, Randall & Hurley cannot give investment advice. More information is available in your Summary Plan Description. Log in to your account to view this document or contact your employer for a copy.