Ask the Experts September 13, 2011

(b)lines Ask the Experts – A Point on Age-50 Catch Up Contributions

September 13, 2011 (PLANSPONSOR (b)lines) – A reader said: “I read with great interest your Ask the Expert Q&A last week regarding the physician who could not contribute to her hospital 403(b) plan since she had already maxed out at the 415 limit ($49,000) in her private practice retirement plan. However, if the physician in question were age-50 or older as of 12/31/2011, could she defer the age-50 catch-up contribution of $5,500 into the 403(b) plan?”
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Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:  

Indeed, you are correct, and thanks for pointing out this distinction! (the Experts should mention that more than one astute reader raised this issue).  

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The age-50 catch-up is a “freebie” under Code Section 414(v), meaning it is not included as an annual addition for 415 limit purposes, nor is it included in any other contribution or nondiscrimination testing limit.  

Thus, an individual who is at least age 50 at the end of a calendar year may always defer the catch-up amount ($5,500 in 2011) in that calendar year, if a) the plan permits the age-50 catch-up election (most do), and b) the employee is eligible to defer to the 403(b) (most are, since only limited classes of employees may be excluded from the right to make deferrals to a 403(b)).  

However if the physician is our example was not 50 years of age or older as of 12/31/2011, the use of the age-50 catch-up would not be possible and no deferrals or other contributions would be permitted. This is due to the fact that the physician already contributed the 415 limit of $49,000 to her private practice plan, which exhausted her contribution limit for 2011 (see Ask the Experts – Contribution Limits in Dual Plans).   

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. 

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Products September 12, 2011

Russell Introduces “Rule-of-Thumb” For An Appropriate Savings Rate

September 12, 2011 (PLANSPONSOR.com) – In its latest research, “What’s the right savings rate?,” Russell Investment proposes a new framework to help defined contribution (DC) plan sponsors better answer the question, “Are my participants saving enough?” and in turn to take measured steps through plan design in an effort to improve participant behavior.

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 “Savings matter because it is the lever over which participants have the most control. Participants who save adequately relative to their retirement spending expectations will greatly diminish their reliance on risk factors outside of their control,” said Josh Cohen, Defined Contribution Practice Leader. “Describing one’s retirement savings rate in terms of target replacement income (TRI) can greatly simplify the retirement savings puzzle.”

The framework is built on exploring the answers to two distinct but related questions:

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How much should participants save for a high chance of achieving a given TRI – the percentage of one’s final, pre-retirement salary that will be required to meet spending needs in retirement?

What TRI is sufficient to fund retirement?

The first question, “How much should participants save?” is addressed by the TRI 30 rule-of-thumb. Participants can determine their appropriate individual savings rates by multiplying their TRI rate by 30%.  According to Russell’s research, saving 30% of the TRI rate each year, including any employer contribution, leads to about a 90% probability of meeting the income goal at retirement.

The second question, “What TRI is sufficient to fund retirement?” is answered in part by an often cited study by AON Consulting and Georgia State University, which provides analysis on how to determine the correct TRI. Russell also outlines additional considerations for determining an individual’s TRI in the paper, including the volatility of health care expenses and the challenges faced by lower-income participants.

“We’ve designed this framework to help plan sponsors determine what the right savings rate is for their average participant,” said Cohen. “There will never be a single answer for everyone, but what we hope is that this approach can spark a smart conversation focused on setting reasonable savings goals.

“Once a plan sponsor has decided on a reasonable TRI for their participants, the next step is to imbed that knowledge into the plan’s design through the company match and auto-features,” he added. “Well thought out plan construction can have an impact on participant behavior and encourage saving at a higher rate. This can provide a cost-effective way for plan sponsors to increase the chance of better retirement outcomes for participants.”

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