Spring 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Some plan sponsors have tried to make it harder for participants to say “no” on their deferral election forms by adding warning language to an opt-out election, such as “STOP AND BE SURE ABOUT THIS DECISION; you are choosing not to save for your retirement through your employer’s plan.” Those employers who sponsor safe harbor 401(k) plans may be less concerned about savings behavior. If employees don’t contribute to their plan, the owners can still maximize their own salary deferrals. Is there anything new these sponsors should consider? They should consider a qualified automatic contribution arrangement, or QACA. This plan design will be available in 2008. It combines automatic enrollment with an employer safe harbor contribution that vests over two years. The automatic deferral rate can start out as low as 3 percent and then gradually escalate to 6 percent of pay. The employer safe harbor contribution is either 3 percent of pay or a match that is at least 100 percent of the first 1 percent deferred from pay, plus 50 percent of deferrals between 1 percent and 6 percent. The maximum match is 3.5 percent of pay. This match formula, together with two-year vesting, is less costly than current safe harbor match formulas. It sounds complicated, but it doesn’t have to be. For example, an employer could ignore the gradual escalation factor by setting the default rate of deferral at 6 percent. Those employees who don’t want to contribute 6 percent of pay could make an election to contribute a different amount. Those interested in the QACA should consult a RubinBrown benefits specialist.

This mindset is called rational self-interest.However, studies in behavioral finance dispute the idea that we make financial decisions rationally. People tend to be overconfident about their future retirement and their ability to continue to work if necessary during their senior years. People also tend to choose instant gratification over future gratification. The person who struggles to come up with $5 per week for the 401(k) plan may spend $5 for a mocha latte or $7.50 for a cold brew at Busch Stadium. What employees say they want is a simpler process for enrollment and tools for calculating how much to save. One of the reasons that automatic enrollment often works well is that it eliminates the deferral rate and investment decisions. However, the enrollment process can be simplified through other means, including the use of risk questionnaires that lead an employee to a suggested asset allocation fund based on their risk tolerance. Many plans now offer either asset allocation funds or lifestyle funds with automatic rebalance features that allow investing to go on autopilot once the initial selection is made. There are numerous articles on the subject of saving. Some state that money from retirement savings plus Social Security should replace 80 percent or more of your pre-retirement income. However, a study by Fidelity says that only 15 percent of households will be likely to have the resources that will replace 85 percent of pre-retirement income. Jack VanDerhei, a researcher for the Employee Benefit Research Institute, has some educated guesses concerning what individuals should save for retirement, assuming they have nothing but Social Security and 401(k) accounts, retire at age 65, and want to replace 80 percent of their pre-retirement income. Under those assumptions, Van Derhei says a male would need to save 6.3 times pre-retirement income and a female about 6.7 times pre-retirement income. For some employees, those are scary numbers.

Questions? Contact:

Dolores Lawrence, CPA, QKA Manager RubinBrown Benefits Group 314.290.3224 dolores.lawrence@rubinbrown.com

Any other ideas to promote savings behavior?

We’ve tried targeted enrollment meetings for the non- saver group. With the assistance of plan sponsors, we have also tried mandatory enrollment meetings.

4 u summer 2007 issue