2. Internal fairness
Externally
competitive
Positively affect
participant
behaviors
Cost effective and
well-administered.
1 November 2010Thomas E. Murphy 2
3. Some smaller employers cannot afford typical
DBP, and even difficult to sponsor a DCP.
Too many legal compliance issues
Too much administrative expense
But, what about HR issues?
Why not use the Individual Retirement
Account (IRA) as a tool to devise a more
efficient employer sponsored plan?
Thomas E. Murphy 31 November 2010
6. Not ordinarily related to
employment
How can employer use
it?
Retirement account
Funded by individual
Investments directed
by owner
Favorable tax
treatment
But, there are limits on
amounts that can be
contributed and on
earnings of owner
Very useful in
“rollovers.”
Minimum distribution
and early withdrawal
limits apply
Roth IRA – after tax
contributions.
Higher AGI limits
Thomas E. Murphy 61 November 2010
7. IRA and Roth Application
Regular:
$5000
$6000 (after age 49)
AGI - $53,000 (phased)
Roth:
$5000; $6000 (age 50)
AGI: $101,000 (2010 –
no limit)
Can participate in ER
plan.
Tax favored retirement
account
Good vehicle for 401(k)
or other “rollovers.”
In such cases, limits do
not apply
Subject to age 70.5
RMD, and age 59.5
early distribution rules.
See IRS Rules on IRAs
Thomas E. Murphy 71 November 2010
8. No discrimination
testing!
It’s Portable
Applicable to
employers with no
more than 100
employees.
Uses IRA as funding
vehicle.
Limited administration.
Employee and
Employer can
contribute.
Employee directs
investments of her
choice.
Limit on employee
contributions
($11,500).
100% immediate
vesting.
Catch ups for over age
50 - $2500
Thomas E. Murphy 81 November 2010
9. Subject to 415 Limits
*Savings Incentive Match for
Employees of Small Employers
Employer must match
100% up to 3% of
salary
Or, if no match, the
employer must make a
2% of salary, non-
elective contribution
for everyone!
Employees making
$5000 are eligible.
Cannot use SIMPLE if
there is another DCP or
DBP covering employees.
Elective deferrals and
employer contributions
must be made to a
SIMPLE IRA, or a 401(k).
Distributions subject to
Early Distribution (59.5)
1 November 2010Thomas E. Murphy 9
10. SIMPLE SEP
KEOGH Money Purchase Plan
Small employer
plans
Thomas E. Murphy 101 November 2010
11. Employer (pre-tax) contributions only (after
1997). No employee income deferrals.
Contributions made to a SEP IRA
Maximum contributions (25%) w/ indexed cap -
$49,000 for 2010.
Investments self-directed; all employees covered
who make more than $550.
It is portable
Employer can elect not to contribute in a given
year.
Testing is not a real issue. Why?
No catch ups
Thomas E. Murphy 111 November 2010
12. What about the
Benefits Model?
The risk allocation?
Can be used by
employers with
more than 100
employees.
1 November 2010Thomas E. Murphy 12
13. “Let’s get rid of the longevity and investment
risk but still have it look like a DBP”
A Money Purchase Plan – a benefit is targeted
but not guaranteed.
Employer contributions expressed as a
percentage of pay are made to the fund.
Favorable tax treatment
Benefit is portable
Limits on contributions and other IRS rules
Thomas E. Murphy 131 November 2010
14. A DBP or DCP (Ind.
401k) typically for
self-employed
Favorable tax
treatment
Contribution limits
based on percentage
of earned income not
compensation.
Age 59.5 and 70.5
limits apply
Can have a Money
Purchase and Profit
Sharing KEOGH.
Available to sole
proprietorship or
partnership
Must cover all over
age 21.
Contribution limits of
20% of business
income ($40 K)
1 November 2010Thomas E. Murphy 14
15. Age of workforce
Competition – degree of
Industry
Labor intensity
Cost, margins, and price sensitivity of
product or service
Affecting behaviors of employees
Financial flexibility
Simplicity of administration.
Thomas E. Murphy 151 November 2010
17. Migration from DBPs to DCPs
Will employees have sufficient income to
retire? What about investment risk?
Will they outlive their retirement income?
What impact does migration have on
employer HR succession strategy?
Use of early retirement incentives by
employers seeking to reduce labor force.
Thomas E. Murphy 171 November 2010
18. See 5.1 at page 138 – Business Factors that
affect type of plan to choose.
Retirement Planning – see pages 143-146.
See Table 5.2 (Review of Pension Plan Design
Features) at page 149.
Safe Harbors: (1) Elective deferrals, employer
matches 100% up to 3% of salary, and 50% up
to 5% of salary. (2) Non-elective, company
contribution of 1% of salary, and 2% after 5
years of service. Maximums covered by §415.
1 November 2010Thomas E. Murphy 18
20. Move to jointly funded DBPs
Are DBPs inherently more efficient and cost
effective?
DBPs rely on the investment expertise of
professional money managers.
Should all benefits be distributed through an
annuity? (See: www.immediateannuities.com )
Should we simplify all the various DCP
approaches into one, retirement savings
vehicle?
Thomas E. Murphy 201 November 2010
21. Are employers spending more on Safe Harbor
401(k)s? Would it be cheaper to simply offer a
DBP?
Government “takeover” of 401(k) plans – or
mandated IRAs for all?
Life cycle/more secure investment funds or a
mixed bag?
Hybrid 401(k) plans – evolve assets into
annuities.
What’s a DBK – a 401(k) with 1% “floor plan” DBP.
During the recession - government temporary
rules on RMD, Safe Harbor, and Early
Distribution rules
Thomas E. Murphy 211 November 2010
22. Should the
government
mandate annuities
for all DCPs?
What are the pros
and cons?
What risks would
such a plan affect?
What new problems
might arise?
1 November 2010Thomas E. Murphy 22
Can you go your own way alone?
24. Aggregation, investments, and savings
strategies will convert to disaggregation and
spending strategies.
All the tax favored treatment will be
converted to taxable treatment.
Try to minimize the impact of taxable
treatment of distributions.
Life expectancy is a key element of the
strategy here
Thomas E. Murphy 241 November 2010
25. Shelter taxable
investments
The Rule of 3 (or 4)!
Investment strategies
should take into
consideration the rate
of inflation.
The amount needed is
not necessarily a
percentage of final
average pay – it relates
to your expected
expenses.
Have a balanced
portfolio and keep it
balanced.
Save aggressively.
Don’t “over stuff” your
401(k).
Timing is important!
Consider roll-overs of
your 401(k) at
retirement.
Thomas E. Murphy 251 November 2010
26. Exploit the tax implications of withdrawals
Consider buying an annuity to resolve the
longevity risk
Use websites to calculate savings necessary
for your retirement and best disaggregation
strategies.
Thomas E. Murphy 261 November 2010
27. If you come up
short, you may
have to go back to
work, or delay
retirement.
You may have to
“replant” yourself
into something
entirely different.
1 November 2010Thomas E. Murphy 27
29. See the Blog The Book - Exercises
Will Baby Boomers
leave the market and
cause a slump in
“buys?” (Blog)
What about IBM’s
401(k)? (Blog at page
119)
Can we “benchmark”
and compare 401(k)s?
See:
www.brightscope.com/
No. 3
(www.nmfn.com/)
No. 4
(www.wsharpe.com)
No. 6
(www.bloomberg.com
- calculators
No. 13
http://www.choosetos
ave.org/ballpark/
1 November 2010Thomas E. Murphy 29
31. At retirement age
65, would a 401(k)
account of
$1,000,000 be
sufficient? What
factors and
calculations are
relevant to answer
this question?
1 November 2010Thomas E. Murphy 31
32. “During those morning commutes, I secretly
agonized over whether I had enough money
socked away to be so casually employed. I
was worried about the Number . . . What are
the chances you will live out your days in
comfort? What happens if you don’t make it
to your Number?” Eisenberg, L., The Number
(2006)
What’s your parents’ “number?” (Exercise No.
2 at page 150)
Thomas E. Murphy 321 November 2010
