As we wrap up the first quarter of 2013, we are receiving several inquiries from plan sponsors regarding InvestMap^TM, Milliman’s retirement glide path technology.

Let me start with some background. Model portfolios offer risk-based options to participants consisting of asset allocations comprising many of the core funds already in the plan. Target date funds are portfolios designed to achieve returns based on a participant’s target retirement date; those closer to retirement will typically have less exposure to equities and commensurate expectations of lower investment returns, while those further from retirement will be exposed to more risk and a higher potential investment return.

InvestMap is a great solution for participants and employers alike because it brings together the benefits of both target date funds and model portfolios. Conceptually, target date funds are a good idea, but product orientation and lack of customization have underscored their limitations. Specifically, target date funds take somewhat of a “catchall” approach at the plan level.

InvestMap is designed to work at the participant level, incorporating the best aspect of target date funds (the automated glide path for which equity exposure is reduced over a period of several years). However, personal risk attributes of individual participants are incorporated as well. This sophisticated “marriage” between risk-based models and an age-based target date glide path, coupled with an open architecture investment platform, provides the best of both worlds for plan sponsors and participants.

The core funds are still available for participants to select their own asset allocations if they choose not to participate in InvestMap.

Advantages to the plan sponsor:

• InvestMap offers fiduciary protection for the construction of the models
• Can be used as the plan’s qualified default investment alternative (QDIA)
• Investment management fee transparency and no additional costs

Advantages for participants:

• Investment education that is easily understood
• Personalized strategies for each participant’s individual risk tolerance
• Hands-off management from initial enrollment to retirement

Please contact your Milliman representative for more information on how InvestMap could benefit your plan.

Unlike many prior generations, Millennials will have to bear the brunt of risk associated with their retirement futures. 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 twentysomethings.

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.

On Friday, November 16, the U.S. Department of Labor issued Announcement 2012-44 to coincide with IRS IR-2012-83 clarifying relief for those affected by Hurricane Sandy.

Relief has been provided for qualified plans that grant loan or hardship distributions due to damage to principal residences located in the areas affected by Hurricane Sandy on October 26, 2012. Plans that do not currently allow for hardship distributions may immediately allow for them as a result of Sandy but these plans must be amended to provide for hardship distributions by the end of the first plan year beginning after December 31, 2012. For example, if your plan year begins January 1, 2013, the deadline to file the amendment is December 31, 2013.

Recordkeepers, for distribution purposes, will rely on participants to provide proof of hardship from “unforeseeable emergency,” and the allowable amount for hardship is limited to the maximum available. While these hardships will not require the participant to be held to the six-month suspension period following a hardship distribution, any that are intended to fall under this relief period must be distributed on or after October 26, 2012, and no later than February 1, 2013.

For more information on eligible localities and other relief provided, please visit this IRS website.

Also, for Milliman’s perspective on the insurance implications of Sandy, read this article. Also, for relief guidance from the Department of Labor and the Pension Benefit Guaranty Corporation, click here.

A small handful of individual companies decide to merge; as part of that merger, they decide to also merge their retirement plans. Seems easy enough, right?

We all too frequently run into companies that have decided to sell or merge without considering the effects on their retirement plans. Merging multiple retirement plans can be great for administrative purposes. However, more often than not a merger results in an enormous consulting project and plan design change. Sponsors should be aware of the complexity before they make the decision to merge.

First and foremost, sponsors should be aware of the deadline to merge the plans. The transition period ends on the last day of the first plan year beginning after the date of the change, provided all involved plans satisfy two conditions. They must be able to pass coverage as of the day before the acquisition and there must not be any significant change in coverage, other than any change directly resulting from the acquisition, or a significant reduction in the benefit provided.

Who will stay, who will go? If all of the involved companies had retirement plans going into the merger, which of the recordkeepers or investment advisors will continue on after the merger? Or will the new company go out to bid and need to take time to sort through proposals and presentations of prospectuses? All of this will take time and needs to be accounted for while laying out a timeline to stay on track for the end of the transition period. Likely issues to consider include:

• Is termination of an existing plan a possibility, either before or after two companies merge? If so, it would make sense to hold off on merging these plans into a consolidated plan until a decision can be made.
• After the companies merge, who will be the key decision makers? There is a risk of too many cooks in the kitchen. Say that you have six companies that merge and each company has a team of three people who previously participated in making decisions. That means 18 people with 18 different personalities and opinions will have to understand and be appeased before any final decisions can be made.
• Once a decision to hire/retain a recordkeeper and investment advisor has been made, a consultant will need a fine-toothed comb to go through the current plan documents for all parties, determining protected benefits that must not be eliminated or reduced and creating a new plan design.
• The consultant and the employer must take into consideration the goals of the plan and the demographics of the participants in order to determine what the optimal plan design will be for the new employer. The best plan design for the company could turn out to be more costly to the employer.
• If the changes to the plan are complex, education meetings may be necessary whereas if the changes are minute they may be effectively summarized within a written notice. Other notices may be required if the plan provides for a “safe harbor” employer contribution, qualified default investment alternative (QDIA), or automatic contribution arrangement (ACA). New 404(a)(5) participant fee disclosure notices must be provided to all who are eligible. As with any change, when participants’ or beneficiaries’ rights to diversify or direct investments or to obtain a loan or distribution is suspended for three or more consecutive business days, a blackout notice must also be provided to the participants.

Needless to say, if you are a plan sponsor or employer contemplating a plan merger, please keep in mind how important retirement plans are in the broad scope of the business transaction. Take time to consult with your recordkeeper prior to putting any changes into effect. The retirement plans may seem like a small part of the entire equation but consulting prior to the change may save you lots of time and money in the long run.

Discussions of the Millennial generation constantly indicate that our youngest working generation is waiting too long to begin saving for retirement or not taking advantage of the retirement plans that their employers offer.

New research published by economists Peter Brady and Michael Bogdan of Investment Company Institute suggest younger employees are more likely to choose cash compensation over retirement benefits. An excerpt of their findings:

Among the 23.5 million full-time, full-year employees aged 30 to 64, 7.6 million earned less than $25,750 a year. These workers are unlikely to have the capacity or desire to save for retirement. Another 3.8 million earned $25,750 to $44,999 in 2011 and were aged 30 to 44. Full-year, full-time workers earning $25,750 to $44,999 may have the ability to save, but because they have other saving priorities, they are likely to delay saving for retirement until after age 44.

Other key research findings in this study:

• Employers compete to offer attractive compensation packages. Depending on the age of the targeted workforce, this may not include a retirement plan.
• Firm size correlates to the availability of a retirement plan for the workers.
• Firms that sponsor retirement plans, regardless of size, have similar participation rates.
• Firms that do not sponsor retirement plans tend to have larger populations of part-time or seasonal employees.
• Younger employees are less likely to search for jobs based on retirement plan benefits and are more likely to save for other reasons while an older/higher-earning workforce is more likely to save for retirement.

 
For more information on their research findings, see the full paper here.

What does this mean for Millennials?

If your employer offers a retirement plan, take advantage of it! There are many others who do not have this option. Remember, if that retirement plan offers a match, deciding not to contribute enough to earn it is like throwing away free money. Along those same lines, if you are a part-time employee check with your HR department to see if you can still meet the eligibility requirements to enter the plan.

Did you know that couples who file a joint federal tax return in 2012 with income under $57,500, or individuals filing income under $28,750, may be eligible for a nonrefundable tax credit of up to $1,000 for contributions made to a qualified retirement plan? See your tax advisor for more details.

Deciding between your employer’s retirement plan or an individual retirement account (IRA)? Pooled assets in retirement plans can make funds with lower cost share classes available to participants, funds that would not otherwise be available to individual investors. Retirement plan fees are often paid by the plan sponsor or split among all participants, whereas with an IRA you alone will be responsible for paying any fees. You should also keep in mind that funds in an employer-sponsored retirement plan that are actively managed by an investment advisor can be very costly on an individual basis.

A boat will not carry you through retirement. Rather than aggressively saving all of your money so you can buy a boat ASAP, why not save smaller amounts over a longer period of time and contribute part of what you’re saving toward your retirement plan?

If you are unaware of how much money you’ll need to save for retirement, or if you’re curious to see how changing your contribution percent will affect your paycheck, visit this helpful site for tools and calculators.

More useful information about retirement for Millennials can be found in this article.

TheStreet.com cites Jinnie Regli’s retirement planning tips for Millennials in this new article.

Here is an excerpt:

“There’ll be a drastic difference [in your retirement nest egg] if you start at age 25 instead of waiting until you turn 55,” says Jinnie Regli of Milliman, a Seattle-based firm that administers 401(k) plans for businesses.

Milliman recently ran the numbers and found that 25-year-olds who make $25,000 a year and put 4% of their pay into 401(k)s will have $491,000 by age 65 — but only $68,000 if they start saving at 55. (The firm’s figures assume a 2.2% company match, 3% yearly raises and 7% annual investment returns.)

Also, this excerpt outlines Regli’s 12 retirement savings tips for millennials:

1. If your employer offers a plan, get to know it.
2. No one else is going to fund your retirement…contribute, contribute, contribute.
3. Consider Roth.
4. Increase your deferral percentage every time you receive a raise.
5. Establish an IRA.
6. Take the free money!
7. Consider your own risk tolerance and take into account the amount of time you have until retirement.
8. Know when the money will be yours.
9. Don’t treat your 401(k) like a glorified savings account.
10. Even if your plan allows them, avoid taking loans against your account.
11. Move your accounts with you.
12. Most importantly—budget and live within your means.

For a more in-depth analysis of each tip, read the entire paper here.

Today’s twentysomethings face numerous economic challenges, especially high unemployment. In this kind of environment, retirement planning is often not high on the list of priorities. But that doesn’t change the fact: Starting to save for retirement earlier pays off later. A new article by Jinnie Regli, “Retirement planning: 12 practical tips for Millennials,” looks at what people in their twenties can do now to prepare for retirement.