Rhodes - Warden Insurance News

Disabilities: Myths and Realities

Wed, 22 Feb 2012 16:46:00 GMT

Here are the top misperceptions employees have about disability, according to The Council for Disability Awareness:

It’s not going to happen to me. A disabling accident occurs every two seconds in the United States, yet nine out of 10 workers dramatically underestimate their chances of becoming disabled. The odds are three in 10 that a worker entering the workforce today will become disabled some time before retiring.
If I do become disabled, it won’t last long. Eighty-five percent of workers surveyed express little or no concern that they may suffer a disability over three months long. While it’s true many disabilities last only a few months, the average disability actually lasts 2.5 years.
They cover disabilities at work. Most employers, particularly larger companies, provide some form of sick pay and long-term disability benefits to employees. That’s not necessarily the case among small employers. More employers offer voluntary disability insurance at the workplace, but some employees opt not to buy the coverage. Also, many employees mistakenly think their medical insurance covers lost wages, but it doesn’t.
I don’t need disability insurance because I have workers’ compensation. More than 90 percent of disabling accidents and illnesses are not work-related and not covered by workers’ compensation.

Why Everyone Needs Long-Term Disability Insurance

Fri, 17 Feb 2012 21:43:00 GMT

What would your employees do if they became injured or ill and couldn’t work for an extended period of time?

By the time people reach age 35, they have a one in three chance of being disabled for more than 90 days during the rest of their working life, according to the Health Insurance Association of America. A recent MetLife survey indicated that an increasing number of employees are more concerned with having financial security in the event of a disability than they are with premature death.

Group long-term disability income (LTD) insurance provides your employees funds to help them meet daily expenses when they cannot work. This security can enhance recruiting, retention and productivity.

Employers can cover the entire cost of LTD, cost-share with the employee or offer coverage as an employee-paid, voluntary benefit. You can also offer group or individual coverage.

Studies show that almost half of mid-size to large employers provide coverage that pays benefits for at least five years. Typical group policies replace 50 to 60 percent of income, which balances disabled employees’ need to meet expenses with the employer’s need to provide incentives to return to the job.

Tax Issues

If the employer pays premiums and does not include those amounts in gross income, employees do not have to pay income taxes on them. However, any benefits they receive from the policy count as taxable income. If the employee pays all or part of premiums, these amounts come from after-tax dollars. But benefits received in this case are tax-free.

Most disability policies are non-cancelable, so the insurance company cannot cancel the policy (except for nonpayment of premiums, of course). This gives employees the right to renew the policy every year without an increase in premium or a reduction in benefits, regardless of their health. However, the insurer has the right to increase premiums as long as it does so for all other policyholders in the same rating class.

What to look for

As with all benefit programs, employers have many options when selecting a group LTD plan:

Ease of use. Employees and employers should have easy, timely access to information. Many employers like having online access to plan information and usage data, including the number of people on leave, average length of leave, and at which locations. For employees, plans often work best when they offer multiple ways to get information, whether mail, phone or online.
Rehabilitation. Evaluate the insurer’s capabilities in rehabilitation and case management. How successful has the carrier been in helping employees return to productive work?

Group long-term disability coverage provides a valuable addition to the well-rounded benefits program. If you’d like to learn more, please contact us and we’ll help find a plan that’s right for you.

The Pros and Cons of AD&D

Mon, 13 Feb 2012 16:39:00 GMT

Accidents can happen in an instant, but the consequences can last a lifetime. Accidental death and dismemberment (AD&D) insurance gives your employees added financial security in sudden and tragic circumstances. AD&D insurance can be a valuable and low-cost addition to your current benefits package. But before offering AD&D coverage, it’s important to understand what AD&D covers and what it doesn’t.

Definition of “Death”

An AD&D policy will pay the policy’s face amount, or death benefit, to the beneficiary if the insured accidentally dies or suffers dismemberment. “Accidental death” under the policy means a death caused by an unforeseen circumstance unrelated to the body. In other words, the death cannot be caused in any way by illness or the insured’s physical condition.

As with most life and health policies, AD&D policies do not cover claims resulting from illegal or criminal activities. They also exclude death by “malfunction of the body,” such as someone suffering a stroke or heart attack while driving. If the heart attack or stroke occurred before the accident and the accident resulted from that bodily malfunction, the policy would not pay. Many policies exclude coverage for death by suicide; others exclude coverage until the policy has been in effect for a certain time period, such as 24 months.

Many policies also impose a time limit on deaths caused by accident. In many cases, if an insured is involved in an accident that ultimately causes death, the policy will pay only if death occurs within 90 days of the accident. Most policies also stipulate that death must result directly from the injuries sustained in the accident. As an example of how this clause would apply, if an insured involved in an auto accident died from an infection contracted in the hospital, the policy would not pay.

Definition of “Dismemberment”

In addition to covering accidental death, AD&D policies pay if the insured suffers an accidental dismemberment. In most cases, the policy provides a scheduled benefit, or a specified portion of the death benefit, for dismemberment. For example, if the insured accidentally loses one arm or one leg, the policy might pay half of the death benefit. If the insured loses two or more limbs (any combination of arms and legs), then he or she might receive the entire face value (death benefit) under the policy. After this, the insurer would likely terminate the policy because it would have paid out the entire face value.

Many AD&D policies also cover sudden loss of vision or hearing. The same principles apply: if one eye is lost, the insured receives half of the death benefit; if both eyes are lost, then the insured will receive the policy’s entire face value.

Some AD&D policies provide coverage for loss of speech or hearing, triplegia (the paralysis of three extremities), paraplegia (paralysis characterized by loss of movement or feeling in the lower half of the body), hemiplegia (paralysis of one half of the body), the loss of a thumb and index finger of the same hand, and a condition known as uniplegia, which is the complete and irreversible paralysis of one limb.

Pros

If your company plans to pay for coverage, you will find the low premiums for AD&D insurance a pleasant surprise. Accidental death and other covered losses occur rarely, so AD&D costs much less than term life coverage with similar limits. This makes it an attractive benefit for your employees, even if offered on a voluntary basis.

AD&D holds particular appeal for young workers, who statistically are more likely to die from accident than illness. The vast majority of these workers do not have individual disability insurance. AD&D benefits could help an insured recoup some of the income lost if he or she lost a limb, sight or hearing in an accident and couldn’t work. AD&D is especially valuable for employees whose jobs depend on their physical capabilities.

You can offer AD&D coverage to employees as a standalone policy or as an addition (endorsement) to a group term life policy. If bought as an addition to a term life policy, AD&D will provide “double indemnity,” or twice the death benefit, to the insured’s beneficiary.

Cons

AD&D insurance coverage has some important limitations. For example, many AD&D insurance policies do not pay benefits if the insured dies during surgery, has a mental or physical illness, has a bacterial infection or hernia or dies as the result of a drug overdose. That’s why AD&D coverage is no substitute for term life insurance. Policies also exclude death or dismemberment resulting from war.

Some financial advisors say AD&D is a poor investment, since the conditions under which it pays benefits occur so rarely. However, if a breadwinner dies suddenly in an accident, AD&D benefits can make the family’s financial circumstances less stressful. And if a young person loses a limb, vision or hearing in an accident, AD&D benefits can help make up some of the income loss likely to result.

Is AD&D coverage right for your company? Please call us for more information

ERISA and Your Voluntary Benefits

Tue, 07 Feb 2012 21:36:00 GMT

ERISA, the Employee Retirement Income Security Act, governs any “employee welfare benefit plan” that is “established or maintained by an employer” for the purpose of providing benefits to the plan’s participants and their beneficiaries. This includes some, but not all, voluntary plans, despite the fact that the employer may not make a single dollar contribution to the plan.

Intent doesn’t determine whether ERISA governs a voluntary plan or not. As a result, you may create an ERISA plan unknowingly and learn about it only after a lawsuit is filed.

What’s So Bad About ERISA?

One of the basic purposes of ERISA is to protect promised benefits. To help accomplish that goal, the statute and regulations require sponsors of ERISA plans to provide summary plan descriptions (SPDs), adhere to ERISA claims procedures, and to file an annual Form 5500 financial status report. These, and other requirements, make administering an ERISA plan more complex than other plans.

Compliance Scorecard

By understanding ERISA rules, you can structure your plans to ensure compliance and keep your company out of hot water. Plans that do not fall under ERISA avoid ERISA’s fiduciary provisions and do not require SPDs, ERISA claims procedures or Form 5500 filings.

To determine whether your voluntary plan falls under ERISA, start with the Department of Labor’s rules detailing “safe-harbor exemptions” from ERISA regulations. To fall within the safe harbor:

The employer can make no contributions.
Employee participation must be voluntary.
The employer’s function must be limited to collecting premiums through payroll deductions and remitting them to the insurer.
The employer cannot receive consideration in connection with the program (other than reasonable compensation for administrative services performed).

In addition, to avoid problems, employers must avoid all actions that could lead employees to believe the plan is employer-sponsored. For information on ERISA compliance, please contact us.

It’s Time to Battle Obesity in the Workplace

Tue, 31 Jan 2012 16:07:00 GMT

People who are obese are 42% more like to require medical care than normal weight people as found by the U.S. Centers for Disease Control. And the problem is getting worse: Two-thirds of adults are now either overweight or obese. Childhood obesity rates have nearly tripled since 1980, from 6.5 percent to 16.3 percent. The proportion of all annual medical costs due to obesity increased from 6.5 percent in 1998 to 9.1 percent in 2010, the study said. For employers, here’s the most alarming news of all: employee obesity costs U.S. employers approximately $45 billion annually, according to a 2006 estimate by the Conference Board and RTI International.

Many experts believe that America has been slow to deal with obesity because many see it as a matter of personal responsibility. But employers can help solve the problem. By encouraging employees to slim down, your employees will be healthier and the company can reduce its healthcare costs.

As part of the National Strategy to Combat Obesity, the non-profit Trust for America’s Health suggests employers consider the following actions:

Offer Wellness and Disease Prevention Programs and Benefits. Offer employees programs and health benefits that help them stay healthy, including nutrition, physical activity, and obesity counseling; subsidize health club memberships and provide insurance discounts for preventive services. Investing in employee health not only improves productivity but also cuts down on absenteeism.
Provide Opportunities for Employees to Be Active During the Day. Maintain clean, well-lit stairwells to encourage employees to take the stairs, and focus on providing healthy food options in vending machines and in cafeterias.
Replace Smoke Breaks with Fitness Breaks. Encourage employees to engage in physical activity on their lunch hours and breaks. Employers have long allowed smokers to step outside for a cigarette break. Consider offering “walking breaks” instead, whereby employees can leave their desks for 10 minutes or so to walk around the office. Walking breaks can improve mental focus in addition to physical health.
Advocate for Prevention Services. Generally, physicians do not receive enough support, resources or reimbursement from insurance companies to prescribe preventive care for patients with chronic diseases. Employers can ask their insurers to offer plans that cover nutrition counseling, weight loss and weight management programs to decrease obesity and prevent the development of chronic diseases.
Employers can do only so much, but by encouraging healthier habits in the workplace, you may see the results in the bottom line.

The Safeway Miracle As a self-insured employer, the grocery store giant Safeway has a vested interest in keeping employee healthcare costs down. During the last four years, its per capita healthcare costs have remained flat while most American companies’ costs have increased an average of 38 percent over the same four years.

How did Safeway do it?

Safeway capitalized on two key insights, according to an article in The Wall Street Journal. The first is that 70 percent of all healthcare costs are the direct result of behavior. The second is that 74 percent of all costs are confined to four chronic conditions: cardiovascular disease, cancer, diabetes and obesity.

Armed with these facts, Safeway instituted a voluntary Healthy Measures program that now covers 74 percent of the company’s insured nonunion workforce. Employees are tested for measures related to the four conditions cited above and receive premium discounts off a “base level” premium for each test they pass. Data is collected by outside parties and not shared with company management. If they pass all four tests, annual premiums are reduced $780 for individuals and $1,560 for families.

Today, Safeway obesity and smoking rates are roughly 70 percent of the national average. When surveyed, 78 percent of Safeway employees rated their health plan as good, very good or excellent. In addition, 76 percent asked for more financial incentives to reward healthy behaviors.

Voluntary Benefits Meet Diverse Employee Needs

Thu, 26 Jan 2012 16:29:00 GMT

Small businesses might be missing an opportunity to enhance their benefit programs and employee loyalty!

In a 2009 survey by the nonprofit International Foundation of Employee Benefit Plans, 84 percent of employers responding said they offered some type of voluntary benefit. An additional 5 percent planned to offer them.

Most employers use voluntary benefits to enhance their life and health benefit portfolio, as reflected in the benefits most frequently offered by employers who offer voluntary benefits:

Term life, 73 percent
Vision insurance, 53 percent
Long-term care insurance, 51 percent
Long-term disability insurance, 50 percent
Accident insurance, 49 percent
Dental insurance, 48 percent.

Source: Top Trends in Voluntary Benefits, 2009. International Foundation of Employee Benefit Plans

The 2009 MetLife Study of Employee Benefits Trends found that while small businesses offer medical insurance at about the same rate as larger companies (95 percent and 96 percent respectively); the gap widens for other products. For example, only 65 percent of businesses with fewer than 500 employees offer dental insurance, compared to 93 percent of those employers with 500 or more employees.

This occurs despite the fact that two-thirds of workers at companies with fewer than 500 employees report that benefits such as life, disability and dental insurance contribute significantly to their feelings of loyalty towards their employer, behind salary and wages (85 percent) and health benefits (71 percent).

All employers, particularly smaller ones, might be reluctant to add expenses during these uncertain economic times. But many employers are missing an opportunity to enhance their benefit programs through voluntary programs, which cost them nothing.

Under a voluntary benefits program, the employer offers employees a menu of benefits; employees select only those they want. Unlike traditional group benefits, voluntary programs require no employer contributions. Employees pay all of the premiums, sometimes on a pre-tax basis (for qualified benefit plans only), through payroll deduction.

While traditional group benefits demand high levels of participation, typically 75 percent, voluntary programs require only 20 percent participation (for most health plans); other voluntary benefits may have no participation requirements.

Another advantage of voluntary benefits is that they are non-discriminatory. Many benefits, such as dependent health and life benefits, dependent care savings accounts and adoption benefits, have value only for those with children or elderly dependents. They’re less likely to appeal to young singles, who might see these benefits as favoring older workers with families if the employer pays for them. With voluntary benefits, employees select and pay for only those benefits that they really want.

Save on Payroll Taxes

If you want to enhance your benefit package but think adding group life, dental, disability, critical care or long-term care insurance might be too expensive, take a look at voluntary plans.

Not only will they cost you nothing, employers can actually save money by combining voluntary benefits with a Section 125 salary reduction plan. The Section 125 plan allows employees to pay for qualified voluntary benefits (such as most medical and life benefits) with pre-tax dollars. This reduces their taxable income.

It also reduces the employer’s payroll tax liability. Companies with a Section 125 plan can save hundreds of dollars per employee if employees participate in their voluntary benefit plans. In addition to health and life coverages, voluntary benefits include other programs, often called “worksite benefits.” These plans can help employees create a better work/life balance and include:

Prepaid legal plans
Pet insurance
Funeral pre-planning services
Auto and homeowners insurance
Mortgages and other financial services.

All can be paid by convenient payroll deduction and many of these programs offer savings over what your employees can find on their own. For more information on voluntary benefits, please contact us.

Design Your Own Health Plan with an HRA

Mon, 23 Jan 2012 16:49:00 GMT

What healthcare plan allows employers to set their own maximum for employee healthcare costs, can be structured to cover 100 percent of preventive care for most employees, and gives employees greater incentive to manage their healthcare costs?

The answer? Health Reimbursement Arrangements, or HRAs. As one of the most flexible healthcare benefits, it’s no surprise that many employers offer HRAs.

HRAs offer tax advantages for both employees and employers. HRAs do not involve insurance—rather, the employer agrees to reimburse eligible employees up to a certain amount each year for qualified healthcare expenses for themselves. HRAs can also cover spouses and eligible dependents, if the employer wishes.

To meet the definition of a qualified HRA, the IRS requires them to (1) be funded solely by the employer and not by salary reduction, and (2) provide benefits only for substantiated medical expenses. In other words, the HRA can only reimburse employees when they provide proof of eligible medical expenses. (3) Only employees or former employees and their spouses and dependents can participate; owners cannot (including owners of partnerships, LLCs, LLPs and S-corporations).

HRAs Offer Flexibility

Employers can tailor HRAs to their needs and those of employees. HRAs can work with other benefits, such as high-deductible health plans (HDHPs) and flexible spending accounts (FSAs). For example, by combining an HRA with a high-deductible health plan, you can provide low-cost health benefits for your employees that will cover 100 percent of preventive care expenses for most employees, such as routine physicals and child immunizations.

HRAs give employers more flexibility in funding and plan design than health savings accounts (HSAs). While HSAs are funded accounts, the employer does not need to set aside funds at the beginning of the year for an HRA. Instead, you can pay reimbursements out of cash flow as need arises. Further, you can allow employees to roll HRA balances over from year to year, if you choose, as well as allowing retirees to participate.

As reimbursement plans, HRAs work better than many other health plans to raise employees’ awareness of the real costs of healthcare, while giving them greater decision-making control over their healthcare spending.

Advantages of HRAs for Employers:

You choose how much to set aside per employee each year, and what types of qualified expenses the HRA will cover, whether preventive care, out-of-pocket expenses, dependent costs or health insurance premiums.
You can deduct reimbursements of qualified claims as a business expense.
You know at the beginning of the year the maximum amount your employee healthcare benefits will cost.
You can offer HRAs with other benefits, including flexible spending accounts.
You will have minimal paperwork and administrative burdens, compared to the costs of self-insuring.

Advantages of HRAs for Employees:

They can exclude reimbursements from gross income.
They may be able to accumulate unused funds for use in future years, depending on plan structure.
They do not have to be covered under any other health care plan to participate, unlike a health savings account (HSA), which requires a high-deductible health plan (HDHP).
They can use funds to be reimbursed for premium payments for a healthcare plan that meets their or their families’ specific needs, as opposed to a standard company plan.
Instead of designing a health plan for a few high-end users, you can design an HRA for the 80 percent of most companies’ employees who are low-end healthcare users. To discuss the uses of HRAs in benefit design, please contact us.

HRA Rules to Remember

Only employer dollars can be used to fund an HRA, not including funds that are considered employer dollars as a result of an election under a Section 125 plan. Funds may roll over from year to year.
The HRA may not be tied to any salary reduction or deferred compensation program, although an accompanying insurance plan may be tied to a salary reduction plan. But the salary reduction may not exceed the actual cost of the insurance plan and may not be pegged to any level of HRA contribution.
The employer sets parameters for the type of healthcare expenses the fund will reimburse. Reimbursements may include items allowed under IRS Section 213(d), or simply expenses not covered by the high-deductible health plan, such as deductibles, coinsurance, co-pays and other cost sharing. HRAs can also reimburse employees for health insurance premiums, such as medical plans, long-term care insurance, dental insurance and dependent coverage. Disability policies do not qualify.
HRAs must be available for COBRA continuation on the same basis as other health plans.
Employers can elect whether to make HRAs available to terminating or retired employees.
Unused HRA funds remain with the employer when an employee terminates. Employers may not bonus terminating employees an amount equivalent to the dollars that remain in their HRA.
HRAs can coexist with flexible spending accounts (FSAs) and cafeteria plans as allowed under Section 125. The notice requires that the HRA be exhausted before the FSA pays. However, an employer may set up the HRA plan document to require FSA exhaustion first.
Many of the timing rules of an FSA do not apply to an HRA, so a mid-year enrollment is allowed, as well as reimbursements that cross calendar years or plan years.
The same non-discrimination rules that apply to other health benefit programs apply to HRAs.

Housekeeping For Retirement Plans

Wed, 18 Jan 2012 19:26:39 GMT

As with nearly everything else, retirement plans require periodic maintenance to keep running smoothly. Here are some suggestions to ensure your plan complies with all laws and regulations and meets the goals of your benefits program.

Keep your plan up-to-date with the law. On a regular basis, ask your benefits professional “when and what” to change in your plan. Those who specialize in retirement programs may provide auditing and plan review services.

Avoid the following common mistakes:

not following the terms of the plan document
not covering the proper employees
not giving employees required information
not depositing employee deferrals or employer
contributions in a timely manner, and
not limiting employee deferrals and employer
contributions to the proper limits.
Periodically review your plan. Errors in a plan brought on by changes in your workforce and its salary deferral patterns are easier and cheaper to fix when they are small and have not been allowed to continue over a long period of time. If you have a SIMPLE IRA, SEP or similar plan, consider a check-up now. Tools include checklists for operating these plans — see IRS Publications 4284, 4285 and 4286 at www.irs.gov.
Get an independent reviewer to check your plan. An independent reviewer may see something that others have overlooked. This could save you and your employees money, and may improve benefits.
Monitor the people who work with your plan. Make sure that those who operate your plan are getting the correct data. Monitor the plan investments. Make sure any fees are appropriate. Make sure plan contributions and distributions are occurring properly and in a timely manner.
Report to the government. Pension and welfare benefit plans must generally file the Form 5500, Annual Return/Report of Employee Benefit Plan, every year to report their financial condition, investments and operations. Plans must generally file the return on the last day of the seventh month after their plan year ends. (If that due date falls on a Saturday, Sunday or federal holiday, then it may be filed on the next business day.) Plans that must file a Form 5500 or Form 5500 EZ include (but are not limited to) profit-sharing plans, stock bonus plans, money purchase plans, 401(k) plans, annuity arrangements under Code section 403(b)(1), custodial accounts established under Code section 403(b)(7) for regulated investment company stock, and individual retirement accounts (IRAs) established by an employer under Code section 408(c).
Correct mistakes now. The Internal Revenue Service’s Self Correction Program (SCP) gives plan sponsors financial incentives for finding and correcting mistakes earlier rather than later. In fact, many mistakes can be corrected easily, without penalty and without notifying the IRS; the plan and its participants keep tax benefits.

You can also ask for IRS assurance about correcting mistakes through the VCP (Voluntary Compliance Program), which works for errors not eligible for self-correction. Errors are corrected and the tax benefits of the plan are preserved for plan participants and the plan sponsor with IRS help. Errors corrected under SCP or VCP are not treated as errors if the IRS audits your plan.
Ask employees for their opinions. Benefits should enhance recruitment, retention and job satisfaction. If the plan isn’t working for your employees, it’s not working for your organization. To get input, you can conduct regular, formal surveys along with making a point of asking individual employees what they think whenever they make a plan change or ask a question about their benefits.

The most effective surveys are brief, simply worded and seek specific information. When designing your survey, ask for the information that will be most valuable to you. For example, you could ask employees if their plan offers enough, too many or too few investment options. Or ask non-participants why they opted not to participate, and what would make them consider participating.
Keep your communications up to date. In addition to providing current information on fund options, deferral limits, etc., consider the tone of your publications as well. Do they reflect current realities? Some plan materials promote a 401(k) or other defined contribution plan as a supplement to a defined benefit plan. However, for most employees, a defined contribution plan is the only employer-
sponsored option they have. Even for those who make maximum deferrals, the typical 401(k) will likely not be enough to fund a comfortable retirement.
Keep informed on the latest retirement plan news. Free and reliable sources of retirement benefit news and information include Retirement News for Employers, a periodic newsletter from IRS Employee Plans; the 401(k) Help Center (www.401khelpcenter.com); and BenefitsLink.com.

Five Retirement Plan Problems And What You Can Do About Them

Tue, 17 Jan 2012 16:38:00 GMT

Low enrollments and low contributions not only mean that you’re not getting your money’s worth out of your administrative dollars; they can also translate into decreased employee loyalty and failure of nondiscrimination tests. Following are five common retirement plan problems and how you can solve them.

Problem 1: Lack of Participation

One study reports that 56 percent of private sector workers had access to a defined contribution (DC) plan in 2006, but only about 40 percent participated. Younger workers and low-income workers are less likely to participate.

Solution: Automatic Enrollment

Several experts interviewed by the U.S. Governmental Accountability Office (GAO) noted that automatic enrollment increases participation because workers who fail to make an active decision will participate by default. Many plan sponsors have adopted automatic enrollment features over the last few years.

The Pension Protection Act of 2006 has made it easier for employers to adopt an automatic enrollment arrangement. You can decide which classes of employees will be subject to auto-enrollment: for example, you can auto-enroll all employees, all full-time employees or only non-union employees. Plans must adopt an amendment and provide affected employees with proper notice describing the features of the plan, including default elective deferrals, or the percentage of the employee’s pay that will be contributed to his/her account. Your plan must also give participants an opportunity to make (or change) a cash or deferred election at least once during each plan year.

Other Solutions: Information and Education

Do you promote participation in your DC plan? Do employees have easy access to information on the plan, as well as to general information on retirement savings, such as retirement calculators? If not, please contact us for suggestions.

Problem 2: Inadequate Contributions

Pension experts say it takes contributions between 12 and 20 percent of pay to achieve adequate retirement income from a DC plan. However, many workers contribute much less. A study by an investment management firm found the median worker contribution in 2007 was 6 percent among the plans it managed, and many employers made no contributions to these plans.

Solution: Automatic Escalation of Contributions

Combining automatic enrollment in DC plans with automatic escalation of contribution rates can help solve this problem. Without automatic escalation, automatic enrollment may lead to insufficient retirement income because employers may set a low default contribution rate for workers, such as 3 percent or less, and many workers will remain at the default level.

As with automatic enrollment, plan sponsors implementing automatic escalation provisions must provide notice to employees and give them adequate opportunities to opt out or change contribution percentages.

Problem 3: Inadequate Investment Returns

In a DC plan, the employer must provide participants with a range of investment options and workers allocate funds among those options according to their individual situations. If investments do not perform well, workers will have less money in their DC plans to provide retirement income.

Solution: Use Life Cycle Funds as a Default Investment

Standard financial theory recommends that individuals shift investments from riskier assets, such as stocks, to more stable assets, such as bonds, as they near retirement. However, one study shows that nearly one in four individuals between the ages of 56 and 64 had more than 90 percent of their 401(k) account balance invested in stocks at the end of 2007. A sharp drop in the stock market, such as the 37 percent fall in the S&P 500 in 2008, can be devastating for these workers, who have few years before retirement to recoup losses.

Life cycle funds automatically adjust the allocation of stocks and bonds according to the individual’s age and expected retirement date. However, experts caution they are not a complete solution and are still evolving.

Problem 4: Overinvestment in the Employer’s Stock

FINRA, the independent securities firm regulator, says, “…an adequately diversified portfolio should have no more than 10 to 20% of total investment assets in company stock. If you concentrate much more than that in company stock, especially in a 401(k) plan where there are trading restrictions, you may expose yourself to more company risk than it is wise to incur.”

Solution: Education

While the Employee Retirement Income Security Act of 1974 (ERISA), restricts defined benefits plans from investing more than 10 percent of assets in company stock, there is no similar restriction on 401(k) plans. Employees can benefit from education that alerts them to these and other investment risks.

Problem 5: High Fees

Investment fees, charged by companies managing mutual funds and other investment products, account for the largest portion of 401(k) plan fees. Workers typically pay these fees. A September 2009 report by Morningstar, Inc., found the average mutual fund fees vary widely, from 0.19 percent to 1.82 percent, a difference of 163 basis points.

Administrative fees, which cover the cost of activities carried out to maintain participant accounts, generally account for the next largest portion of plan fees. Although employers often pay the administrative fees, workers bear them in a growing number of plans.

Over the course of a worker’s career, fees may significantly decrease retirement savings by lowering the net investment returns. Although seemingly insignificant, a 1 percentage point difference in fees can substantially reduce the amount of money saved for retirement. An individual 45 years old who leaves $20,000 in a 401(k) account for 20 years would have an ending balance of about $70,500 with an average annual investment return of 7 percent minus a 0.5 percent charge for fees. However, if returns remain 7 percent but fees increase to 1.5 percent annually, that $20,000 will grow to only about $58,400 over 20 years—a difference of about 17 percent.

Solution: Opt for Low-Fee Plans

The fee information employers are required to disclose is limited and does not provide workers with easy comparisons between fees charged for different investment options. Employers can assist their employees by comparison shopping and selecting a plan provider that charges low administrative fees and a variety of low-fee investment options. Other solutions include educating employees on the impact high fees can have on their account balances.

No Slip-Sliding Away: How To Stay On The Road

Mon, 16 Jan 2012 22:25:39 GMT

One thing is easy to foretell: Unpredictable weather can cause reduced visibility and hazardous driving conditions that make it challenging for even the most experienced drivers. Fortunately, there are ways to protect yourself, your passengers and your car.

The following tips can help you stay safe when faced with treacherous roads:

Assemble a winter emergency kit. At a minimum, it should contain a blanket, boots, shovel, nonperishable food and a flashlight.
Plan ahead for stopping and turning. “Feather” the brakes when approaching a stop, especially if the road is slick. If turning, accelerate very gently through the turn.
Don’t make any sudden moves. Keep it slow and steady to maintain control.
Be cautious when braking in icy conditions. Coast over ice. Brake after reaching bare pavement. And never slam on the brakes. Brake gently in a pulsing fashion.
Steer into a skid. Remember: Locked wheels lead. If your rear tires are in a skid and “locked,” the rear of your car will start sliding to lead the car down the road. If this happens, steer into the skid, not away, and remember, don’t brake during a skid.

If you follow these tips but still find yourself in a crash, just remember that what you do after an accident can make a big difference in keeping everyone safe and in helping you and your insurance company work through a claim.

Stay calm. Stay at the scene but move off the roadway. Warn oncoming traffic by activating your hazard warning lights and/or setting flares.
Call the police.
Contact your insurance company to file a claim. The earlier your insurance company knows about the accident, the earlier it can get to work to resolve it.
Do not admit fault. Only discuss the accident with the police and your claims representative.
Exchange information with the other driver(s). And remember to get contact information for any witnesses.