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UFIR



Employer Sponsored Retirement Savings Plans
http://edis.ifas.ufl.edu/ ( Publisher's URL )
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Permanent Link: http://ufdc.ufl.edu/IR00000883/00001
 Material Information
Title: Employer Sponsored Retirement Savings Plans
Physical Description: Fact Sheet
Creator: Dorman, Rachel
Leslie, Lisa M.
Gutter, Michael S.
Gillen, Martie
Turner, Josephine
Publisher: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication: Gainesville, Fla.
Publication Date: 2012
 Notes
Abstract: A financially secure retirement is a goal for many workers, and the ability to achieve that plan can be helped by employer-sponsored retirement plans. Learn more in this 3-page fact sheet.
Acquisition: Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Diana Hagan.
Publication Status: Published
General Note: "Publication #FCS5258b"
 Record Information
Source Institution: University of Florida Institutional Repository
Holding Location: University of Florida
Rights Management: All rights reserved by the submitter.
System ID: IR00000883:00001

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FCS5258b Employer Sponsored Retirement Savings Plans1Rachel Dorman, Lisa M. Leslie, Michael S. Gutter, Martie Gillen, and Josephine Turner2 1. This document is FCS5258b, one of a series of the Department of Family Youth and Community Sciences Department, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Original publication date April 2012. Visit the EDIS website at http://edis.ifas. u.edu 2. R achel Dorman, MS student; Lisa M. Leslie, Extension agent II, Hillsborough County; Michael S. Gutter, assistant professor, Department of Family, Youth and Community Sciences; Martie Gillen, assistant professor, Department of Family, Youth and Community Sciences; and Josephine Turner, professor emeritus, Department of Family, Youth and Community Sciences, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL 32611.The Institute of Food and Agricultural Sciences (IFAS) is an Equal Opportunity Institution authorized to provide research, educational information and other services only to individuals and institutions that function with non-discrimination with respect to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or aliations. U.S. Department of Agriculture, Cooperative Extension Service, University of Florida, IFAS, Florida A&M University Cooperative Extension Program, and Boards of County Commissioners Cooperating. Millie Ferrer-Chancy, Interim DeanA nancially secure retirement is a goal for many workers, and the ability to achieve that plan can be helped by employer-sponsored retirement plans. Employer-sponsored plans can be qualied or unqualied. Qualied plans are approved by the IRS and provide a tax-advantaged way to save for retirement. An example of a qualied plan is a dened-contribution plan such as a 401(k) plan. Smaller employers may oer non-qualied plans such as Simplied Employee Pension plans or Savings Incentive Match Plan for Employees (SIMPLE), and even though these plans are considered non-qualied, they do come with tax advantages. Since employer-sponsored plans are designed as retirement plans and have tax advantages, typically there is a penalty for withdrawing funds before reaching retirement age. For many plans, both the employer and the employee contribute money into the plan. e employees contributions are owned by the employee. e employee gains ownership of the employers contributions through vesting. Once an employee is fully vested, they own the employers contributions and earnings and are entitled to those funds even if employment is terminated. Qualied plans may oer dierent vesting schedules that can range from immediate vesting to 100% vesting aer 3 years, to a vesting schedule that increases the employees vested percentage for each year of service. SEP and SIMPLE IRA plans require that the employee is always 100% vested. Many employers match employee contributions up to a certain limit. For example, a company might match each dollar an employee contributes up to 3% of the employees pay. is is a great benet, and, when feasible, an employee should contribute the amount or percentage required to obtain the maximum match the employer has to oer, which equates to receiving free money.Dened-Benet PlanDened-benet plans are also known as pension plans. Once the traditional way companies helped an employee prepare for retirement, the availability of these plans has sharply declined over the last 2 decades. In this type of plan, the company denes the benets that the employee will receive in retirement. Most companies provide the funds as monthly payments during retirement, but some plans may provide lump sum cash payouts at retirement. e amount of money that an employee will receive is typically based on number of years with the company and salary. e employer contributes the funds and the employer or an appointed nancial company makes the investment decisions. Most private-sector traditional pension plans are guaranteed by the US Pension Benet Guaranty Corporation (PBGC). So if an employer is unable to sustain payments to a retiree, PBGC becomes the trustee of the plan. e maximum amount of continued retiree payment that PBGC will guarantee is set yearly by federal law. In 2011, PBGC guaranteed up to $54,000 per year to workers

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2who started receiving payments from PBGC at age 65. For workers who started receiving benets from PBGC before age 65 or who had surviving spouses or beneciary benets, the maximum guaranteed was lower. An employee working for a company with a dened benet plan should investigate: e formula used for calculating benets. Whether the plan provides cost of living adjustments and how those are calculated. e impact of early retirement. Whether or not the plan is guaranteed by the PBGC. In addition, an employee should not assume the plan will fully fund all retirement needs. A person who has the potential for a variety of resources in retirementsuch as pensions, investments, and Social Securitywill have a better chance at nancial security in later life.Cash BalanceCash balance plans are another type of dened benet plan in which the employer makes all of the contributions, the amount of the benet is guaranteed, and the employer bears the nancial risk of being able to maintain the plan. Cash balance plans are dierent from traditional pension plans in that each employees funds are tracked in an individual account; thus, an employee can track the cash balance of their account. Employers can choose among several methods to determine how much they will contribute to their employees accounts. ese methods include a xed percentage of earnings, age plus years of service, or a percentage based on years of service, age, or earnings. Regardless of method, the amount the employer contributes must be sucient to pay a dened retirement benet. e employer will work with an actuary to determine the amount of contribution that is needed to ensure that benet obligation can be met. When an employee reaches retirement age, they can choose to receive their benets as a monthly annuity or a lump sum benet. If employment with the company is terminated prior to retirement age, a vested employee can receive the benets as a lump sum or roll the funds into an IRA or a new employers retirement plan.Dened-Contribution PlanA dened-contribution plan is a plan in which the contribution is specied. e amount received at retirement will depend on how much money is contributed and investment performance. is means that the burden of investment risk of the account is on the employee, not the employer. As discussed earlier, some employers provide matching contributions. One common example of a dened contribution plan is a 401(k) plan. In this type of plan, employee contributions are made tax-deferred. In 2012, the maximum amount that an employee can contribute to their 401(k) will be $17,000. Participants who are age 50 or older at the end of the calendar year can make additional catch-up contributions of $5,500. An employee in a 401 (k) plan may have a variety of investment products from which to choose, such as dierent types of mutual funds, stocks, bonds, and deposit accounts. e employee can make changes to their dened contribution amount up to the limits and also may make changes to how their contributions are allocated among the investment products. If employment with the employer is terminated, an employee may choose to roll over their 401(k) plan to an Individual Retirement Account (IRA), keep the funds in the plan (if permitted by the existing plan), transfer the money to a new employers 401(k), or cash out. Cashing out before retirement age will lead to a 10% penalty and taxes at the employees current tax rate. If the funds are transferred directly from the 401(k) plan to a new retirement plan, it is called a trustee-to-trustee rollover, and the employee will avoid paying taxes and penalties to the federal government.Hybrid PlansMoney-purchase and target-benet plans have characteristics of both dened-benet and dened-contribution plans. e amount the employer contributes is dened. However, the amount received in retirement will depend on investment performance, so the risk of not having adequate funds in retirement is carried by the employee.Money PurchaseIn a money purchase plan, the employer puts a xed percentage of an employees income into the employees retirement account every year. e employee can also contribute to the plan. In 2012 federal tax rules limited contributions to the lesser of 25% of the employees compensation or $50,000.

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3e actual amount received in retirement will depend on how much the employee has contributed and the investment performance of their accounts. ese plans are best t for younger rather than older people. Younger people will have more money added and a greater length of time to gain returns (Dalton, 2008).Target BenetTarget benet plans are similar to a dened contribution plan because the goal is to provide a specic or targeted retirement benet amount to the employee. e amount the employer contributes to the plan is based on that projection. However, the actual amount received will depend on investment performance. is type of plan may work well for older employees. In order for the employer to meet the employees approaching retirement need, they will have to contribute larger amounts (Dalton, 2008).Simplied Employee Pension (SEP)is type of retirement plan is one in which all the contributions are made by the employer into a traditional IRA (each employee has a separate IRA). SEPs provide an employee with a tax-deferred savings benets and portability. A benet of SEPs is that contribution levels can be high. ey are much higher than the maximum allowed deductible contribution to a traditional IRA. Federal law sets the 2012 the contribution limits for a SEP at the lesser of 25% of the employees compensation or $50,000. SEPs do not allow for additional catch-up contributions for those who are 50 years of age or older. SEPs do require that all employees are immediately 100% vested. ere is no required schedule for how oen or how much an employer must contribute to an employees SEP. e employee is dependent on the frequency and amount of the employers contributions to the plan. ere is a risk of an employer not adding regularly or not adding a large enough amount (Dalton, 2008).Savings Incentive Match Plans for Employees (SIMPLEs)SIMPLEs are allowed for companies that have 100 employees or less, so these types of plans are common for self-employed individuals and small business owners. An employer can set this plan up in the form of a SIMPLE IRA or a SIMPLE 401(K). e SIMPLE IRA is more common because it is the easier of the two to administer. Both employees and employers can make tax-deferred contributions to the plan. e employee is 100% vested from the start of the plan. In 2012, tax rules allow employees to contribute up to $11,500 and an additional $2,500 if the employee is over the age of 50 by the end of the calendar year. Each year an employee can make changes to the level of their contributions during a designated election period. Generally, rollovers from a SIMPLE to another IRA are permitted as long as it has been more than 2 years since the employee started participating in the plan. Employers can choose between two dierent contribution methods. One method is for the employer to contribute 2% of each employees salary regardless of whether the employee contributes. e other option is for the employers to provide a dollar-for-dollar match for up to 3% of the employees salary. In this matching situation, only employees who have elected to make contributions will receive the employers contribution.References:Dalton, M. (2008). Retirement planning and employee benets for nancial planners, Fih Edition. S. Rose, LA: Money Education. Dalton, M., J. Dalton, R. Cangelosi, R. Guttery, and S. Wasserman. (2007). Personal Financial Planning eory and Practice Chapter 16, Basic Retirement Plans, Fih Edition, Kaplan Financial, LA. Internal Revenue Service (2011). Retirement Topics: Vesting, retrieved October 21, 2011 from http://www.irs. gov/retirement/participant/article/0,,id=211324,00.html Leimberg, S., & McFadden, J. (2011). e tools and tech niques of employee benet and retirement planning, twelh edition Erlanger, KY: e National Underwriter Company. Swanson, P. and B. Wollan. (2007). Iowa State University Publication series, Retirement: Secure Your Dreams. retrieved October 24, 2011 from http://www.extension. iastate.edu/families/retirement US Department of Labor Statistics, Questions and Answers on Cash Balance Pension Plans, retrieved October 24, 2011 from http://www.bls.gov/opub/cwc/cm20030917ar01p1. htm US Department of Labor, SIMPLE IRA Plans for Small Business retrieved October 24, 2011 from http://www.dol. gov/ebsa/publications/simple.html