I had a chance recently to watch the piece about 401(k) plans by Martin Smith on the PBS program Frontline, “The Retirement Gamble”. The piece takes a critical look at the 401(k) plan as the central retirement savings vehicle for most Americans. Smith covers a brief history of the 401(k), the market turmoil that has shaken confidence in it, and the various points of confusion and conflicts of interest that can occur in the 401(k) marketplace. In short, it paints a worrisome picture of the retirement industry.

In general, this is good information for 401(k) participants to have. Lack of participant engagement is a dominant force in the retirement readiness arena that we retirement plan professionals work hard to counteract. Smith’s work to stoke the ire of 401(k) plan participants may inspire some of them to actually open and read the statements and fee disclosure notices we diligently send them. Cautionary tales about not dipping into your plan are important at a time when many people are doing just that.

However, Smith’s piece only paints part of the picture—saving for retirement doesn’t have to be such a gamble. He says next to nothing about what people can or should actually do to improve their retirement accounts besides keep working, and dream of winning the lottery. The advice to participants to request formal acknowledgment from their financial advisors of their status as a “fiduciary” is dubious at best (for one problem, it’s unlikely the average participant could draft a meaningful fiduciary contract). Smith’s piece does not reflect the recent legislative and litigation efforts—enhanced fee disclosure, increased fiduciary responsibilities—which, while slow to develop and long overdue, are nonetheless beginning to address the very problems Smith laments.

So, for participants who were left wondering, and for plan sponsors who are fielding questions, what can each of us do to improve our odds at a secure retirement?

1) Start saving! If you haven’t started already, or perhaps stopped as a result of recent economic turmoil, it’s critically important to set aside money for savings on a regular basis. How much? Typical recommendations range from 6% to 20% depending on age, investment style, current savings, and other factors. Many employers contribute regularly to 401(k) plans, as well, to help participants reach that target savings rate. A retirement income calculator such as Milliman’s PlanAhead for Retirement® tool is a great way to hone in on an amount to save.

2) Choose a diversified investment strategy. This doesn’t have to be hard. Selecting a target date fund counts as a diversification strategy.

3) Understand your plan’s investment and transaction fees (and the impact thereof) by reading the annual disclosure notice and the fees section of account statements. An HR representative can help with most questions. Employers are required to act as fiduciaries and should have additional resources for any questions they can’t answer themselves. Use this information to fine-tune #1 and #2 above.

As part of the proposed federal fiscal year 2014 budget, President Obama included a cap on the amount of retirement savings an individual could accumulate in tax-deferred retirement plans. The total accumulation amount for an individual includes all qualified tax-deferred savings plans such as traditional defined benefit (DB), cash balance, money purchase, profit sharing, 401(k), and 403(b) plans, as well as funded governmental 457(b) arrangements and Individual Retirement Accounts (IRAs), both traditional and Roth.

The proposal is most likely a result of the presidential campaign last year, during which it was reported that Governor Mitt Romney had qualified accounts in excess of $100 million. However, the Administration’s budget proposal would not tax accumulated accounts in excess of the cap. If the accumulated accounts exceed the cap, the individual would not be allowed to make future deferrals or receive any future employer contributions under any retirement plan.

The proposal would essentially cap tax-advantaged retirement plans to an amount necessary to provide the maximum annuity permitted under a defined benefit plan. The current limit is $205,000 payable annually at age 62. The annual annuity amount would be increased by a cost of living adjustment.

After converting the annuity to a present value using current interest rates, the total accumulation amount is approximately $3.0 million to $3.4 million. Because of the current low interest rate environment, that total accumulation amount is inflated. If interest rates return to a historical level, the maximum accumulated amount could be as low as $2.2 million to $2.4 million for an individual age 62.

No real details are available on how account values would be reported or how the cap would be calculated. There is a concern small business owners could eliminate their retirement plans if they were at the accumulated cap, because they would not receive the benefit of tax-deferred treatment. As a result, retirement savings vehicles for many rank and file employees could be eliminated. As an alternative, consideration could be taken to limit only employee deferrals under the proposal or a portion of employer provided contributions, allowing small business owners some incentive to keep their retirement plans.

Under the proposal, it is estimated that the accumulation cap would result in approximately $9 billion in additional federal tax revenue over the next 10 years beginning October 1, 2013. On the flip side, it has not been determined how much tax revenue would be lost in future years as a result of smaller account balances for these taxpayers. All distributions from qualified retirement plans (other than Roth accounts) are taxed at distribution.

It will be interesting to see if this proposal will gain traction with lawmakers.

Unlike many prior generations, Millennials will have to bear the brunt of risk associated with their retirement future. In this USA Today article, Jinnie Regli discusses the general mindset Millennials have towards retirement savings.

Here is an excerpt:

Even if the smart, tech-savvy generation of Millennials are told about the benefits of the stock market, they still may have no appetite for risk.

…retirement savings does not create much top-of-mind awareness among Gen Y. “With Millennials that I talk to, retirement is so far off that it doesn’t seem to be something that needs to be talked about now,” says Jinnie Regli, a Millennial who is a client service administrator at Milliman, a consulting and actuarial firm.

…For Millennials life is a balancing act between saving money and paying down debt. Regli advises them to contribute whatever they can to their retirement account. “Never think that anything you contribute is too small,” she says. “And if your plan offers a match, remember that not contributing to the plan is like throwing away free money.”

Read Jinnie’s article, “Retirement planning: 12 practical tips for Millennials”, where she offers retirement planning suggestions for twenty-somethings.

A recently published article by the National Institute of Retirement Security found that a whopping 85% of Americans surveyed are concerned about their retirement prospects. Also, 83% of Americans surveyed report favorable views of pensions (also known as defined benefit or DB plans) and 82% indicate they believe that those with DB plans are more likely to a have a secure retirement. What is also interesting is that about 59% of Americans surveyed say the availability of pensions was a factor in their decision to work for their current employer. Americans feel that our leaders in Washington do not understand families’ and individuals’ struggles to save for retirement.

This all comes on the heels of action that plan sponsors of DB plans are taking to freeze or terminate their plans and also as many participants are realizing that their 401(k) plans will not provide adequate replacement income when they retire. As many Americans continue to be concerned about outliving their retirement savings, longevity benefits are gaining interest. DB plans have built-in longevity features that provide a stream of annuity payments for a participant’s lifetime. Given that DB plans place all the risk on the plan sponsor and that defined contribution (DC) plans, such as 401(k) plans, place all the risks on the individuals, many employees overwhelmingly support congressional action to provide all Americans with access to a new type of privately run pension plan. The proposed new plan would be portable from job to job, allow for a regular check that lasts throughout retirement, and easy for employers to administer while offering professional money management. The characteristics are similar to a possible proposal by the U.S. Senate called Universal, Secure, and Adaptable (USA) retirement funds.

The survey also provides many interesting facts about Millennials. They believe the current retirement system is broken and about 95% of those surveyed believe lawmakers need to make retirement reform a higher priority.

About 65% of Americans surveyed support protecting Social Security and say that it is a mistake to cut government spending in such a way that reduces Social Security benefits. About 73% of Americans surveyed support pension benefits for public workers because some segments of the public workforce have high-risk jobs and/or lower pay. In addition, public employees contribute toward their pension benefits with each paycheck.

Finally, the survey confirmed that a majority of Americans, about 87%, believe that the increasing number of Baby Boomers retiring without pensions and adequate savings is straining families and the economy.

There is a long way to go before changes could potentially be made to fix the current retirement system. However, if more and more Americans believe that their retirement security is endangered, communicating that to congressional leaders may create a chance for change in the future. DB plans have been the cornerstone of retirement security for our parents and it should be available to new generations as they retire in subsequent years.

Most individuals are beginning the process of preparing their income tax returns this time of year—paying taxes later is not an option that presents itself. However, an item in the American Taxpayer Relief Act of 2012 has added the flexibility for retirement plans to allow individuals to choose to pay income taxes on their retirement accounts now, so that it won’t be necessary when they retire and begin to draw the money out.

That is the primary attraction of a Roth account. If your 401(k) plan currently has a Roth option, the good news is that you may be eligible for this conversion. However, it will require some research to determine if it’s the right decision for you.

At face value, the trade-off is simple. If you convert pretax dollars to a Roth account within your plan you are essentially taking a distribution, within the plan, and opting to pay taxes in the year of conversion at your current income tax rate. This, of course, leads to an increase in taxes that are due for that year, and may even increase the tax bracket you are in. Once done, the new Roth dollars and any future earnings will grow tax-free as long as you hold the account for at least five years and are at least age 59 and a half years old before you withdraw it from the plan. A word of caution: the conversion is irreversible and therefore requires some forethought and analysis.

The types of individuals that may benefit most from this include people who anticipate making a significantly higher income as they near retirement, or believe they will be in a higher tax bracket in retirement. Individuals who believe this will find that a Roth account may fill a need in their estate planning. It’s important to project how these changes will affect individual tax situations and to make sure the available resources outside of the plan are there to pay for the taxes now. Specific details on the new Roth conversion are still being researched and guidance is needed before most retirement plans will consider adding this provision.

As an employee you can consult your summary plan description or talk to your employer’s benefits department to find out if your plan currently allows Roth accounts and whether the plan will add the feature to allow you to convert your pretax dollars. It’s great to have options when it comes to saving for retirement because it’s within those options that you’re able to develop an effective strategy to meet your retirement goals.

Effective January 1, 2013, the recently negotiated and signed American Taxpayer Relief Act of 2012 includes provisions for in-plan Roth conversions. The new provision is akin to the in-plan Roth rollover, with the difference being that the provision is applicable for amounts that are not currently eligible for distribution. The legislation benefits plan sponsors and participants but it also provides a revenue stream for the federal government.

Roth contributions to a qualified 401(k) or 403(b) plan or to a governmental 457(b) plan are made on an after-tax basis. This means participants pay taxes on contributions now, not later. Before the new rules, if a plan permitted an in-plan Roth “rollover,” then a participant could move money from a non-Roth plan account (pretax salary deferrals, employer match, employer nonelective contributions) to the Roth account within the same plan. Participants were only allowed to do this if they had distributable events (i.e., distribution at age 59½, severance from employment) and the amount was eligible for rollover. Under the new law, if a plan permits an in-plan Roth “conversion,” then a participant may move money from a non-Roth plan account to the Roth account within the same plan, without having a distributable event.

If participants decide to take advantage of an in-plan Roth conversion, they will pay income taxes at their current tax rates. The conversion is not subject to mandatory or optional withholding, nor to the early 10% penalty tax, although a recapture rule may apply a 10% penalty if in-plan Roth amounts are distributed within a five-year period. This means the participant needs to think about the following: Is my tax bracket at retirement going to be higher than it is now and do I have the money outside of my plan assets to cover the taxes?

If participants expect to remain in the same tax bracket for the remainder of their working careers, there is no advantage to paying the tax now. However, for participants who believe they will be in higher brackets as they go through their working careers and in retirement, and have other money available to cover the income tax, then conversion of a non-Roth account may be beneficial. The converted amount would be considered tax-free, as are the future earnings on it, if certain requirements are met, including a five-year holding period. If the participant will cross multiple tax brackets, it may be beneficial to spread the Roth conversions over multiple years. This helps the participant accumulate resources to pay the taxes and makes the conversion more affordable.

There are additional questions and considerations the participant needs to address, such as when to retire, whether to work after retirement, how much money will be needed in retirement, whether estate taxes must be paid, and how much Social Security provides. These are not easy questions to answer, but taxes and taxable income may impact the answers. Most participants want to maintain a standard of living in retirement that is not less than what they currently have. Considering after-tax investment vehicles, such as a Roth account, may help participants achieve their financial retirement goals.

Are you on track to meet your retirement goals? If you’re unable to answer or would rather avoid thinking about it, you’re not alone.

In a 2012 retirement confidence survey conducted by the Employee Benefit Research Institute, 56% said they determined their retirement savings needs by guessing. The fact is this percentage is much higher than it needs to be. Recordkeepers and administrators have made enormous strides in creating tools and calculators, such as Milliman’s PlanAhead For Retirement®, which work to align retirement saving strategies to estimated required retirement savings needs. Of those surveyed who have utilized a calculator to estimate required retirement savings, 59% reported saving or investing more as a result.

A retirement calculator’s primary objectives is to take the information provided about current retirement plans, offer a rough assessment of retirement readiness, explore possible changes in current investment or savings strategies, and project how those changes could affect retirement outcomes. Contrary to popular belief, these calculators have not been created to scare plan participants into contributing more but rather to educate and bring an awareness of how that lump of money sitting in your 401(k) account will translate to income at retirement. No matter what your age or profession, it’s important to take the time to utilize a retirement calculator to estimate required retirement savings in order to avoid finding oneself unprepared when nearing retirement.

Here are a few quick retirement calculator dos and don’ts:

• Do:

o Be realistic about your retirement age and life expectancy
o Be honest about retirement expenses; it’s OK to plan to travel or buy a sports car after retirement but make sure to factor those costs into the expenses
o Periodically review your investment strategy and consider speaking with an investment professional to make sure it matches with your retirement strategy
o Continue to check back and update your information even if retirement calculators project that you are on track to meet your retirement goals

• Don’t:

o Change your inputs just to get a successful projection; changing life expectancy to age 50 just to attain an “on track” projection, for example, does not do any good, nor is it realistic
o Panic if the projection says you’re not on track; most calculators will offer suggestions and even allow adjustments to variables to see how each change could affect retirement savings
o Rely on these calculators as a sole basis for your retirement planning decisions—they are for educational purposes only

Poll:

There are some things about your 401(k) you should know. In her new article, Jinnie Regli provides 10 items that can help you maximize your 401(k) retirement plan. Here is an excerpt:

1. Average 401(k) account balances are up but that average account still won’t support the average person’s retirement. During November, Fidelity Investments published research that said that the average account balance as of the end of the third quarter of 2012 was the highest they’ve seen since they began tracking account data in 2000, at $75,900. Although this is a significant increase from 2009, when the average account balance was $46,200, the fact is that $75,900 may not be enough to support the average American’s retirement.

2. You should utilize tools to calculate your retirement readiness and adjust your savings strategy. In a 2011 retirement confidence survey conducted by the Employee Benefit Research Institute, 42% said they determined their retirement savings needs by guessing. The fact is this percentage is much higher than it needs to be. Recordkeepers and administrators have made enormous strides in creating calculators that work to align your retirement saving strategy to your estimated required retirement savings need. Of those surveyed who have utilized a calculator to estimate required retirement savings, 59% reported saving or investing more as a result. Please take the time now to utilize these calculators so you won’t find yourself unprepared when nearing retirement.

3. It’s important that you understand the fees you pay to participate in your 401(k) plan. Fee transparency is important on a participant level because the fees assessed to your account will impact your account growth.

Your employer is required to deliver fee information to you in two ways. Your quarterly statement must include an itemized listing of fees, if any, that were assessed to your account over the quarter. The second requirement is an annual notice that discloses fund performance, fund expense ratios, benchmarks, information about designated investment managers, the use of revenue sharing to offset plan expenses (if applicable), and any fees that you may incur if you initiate transactions from your account. Even if you’re not currently contributing to your employer’s 401(k plan, you should expect to receive a copy of this notice every year. This document is full of useful information and shouldn’t be discarded.

While these disclosures are important to you as a participant, it’s also vital to note that an individual retirement account (IRA) may sometimes be more costly to maintain than a 401(k) plan through your employer. Fees for investment advisors or administration are often split between all of the active participant accounts in a 401(k) plan while with an IRA you may be standing alone in funding those fees. Please take the time to stay informed about the fees associated with your accounts.

To read the entire article and see all ten considerations, click here.

The Internal Revenue Service (IRS) released Revenue Procedure 2013-12, updating the Employee Plans Compliance Resolution System (EPCRS) that permits retirement plan sponsors and administrators to voluntarily correct certain errors to maintain a plan’s tax-qualified status. The new guidance generally is effective April 1, 2013, but plan sponsors may apply the procedures on or after December 31, 2012. The updated guidance includes new submission procedures and application forms, modified correction procedures for 403(b) plans, and several important changes affecting correction methods for 401(k) and defined benefit plans.

Key significant issues addressed include:

• Expanded correction procedures for 403(b) plans: Errors occurring in 403(b) plans may be corrected in the same manner as qualified plans. In addition, the EPCRS permits 403(b) plan sponsors to correct failures to adopt a written plan document that satisfies the IRS’s final rule for 403(b) plans. The new procedure also adds a safe harbor correction for a failure to include employees under the “universal availability” requirement.
• Revised submission procedures for the Voluntary Correction Program (VCP): The new guidance modifies the schedules, forms, and mailing addresses for making VCP submissions; with a few exceptions, the fees remain the same as under the 2008 procedures.
• Rules for defined benefit funding-based restrictions: Single employer defined benefit plan sponsors may newly correct operational failures related to noncompliance with tax code section 436 restrictions when a plan is underfunded.
• Rules for certain 457(b) deferred compensation plans: The guidance clarifies that only funded governmental 457(b) plans (and not nonprofit 457[b] plans) are eligible for correction on a provisional basis under standards similar to EPCRS.
• Qualified nonelective contributions (QNECs): Plan sponsors are prohibited from using forfeited 401(k) amounts to correct nondiscrimination testing failures (e.g., ADP or ACP).

For more information about the updated EPCRS or for assistance with pursuing corrective actions, please contact your Milliman consultant.

The 2012 PLANSPONSOR Defined Contribution Survey lists Milliman among the best 401(k) providers “based on evaluations from more than 6,000 companies.” The firm won the most Best in Class “cups” across all client size categories for each designated service targeting plan sponsors and participants.

For more 401(k) perspective from Milliman, click here. Addition information on Milliman’s DC services can be found here.