Retirement Plans

Retirement Plans

FIN/422

Retirement Plans

Introduction

This week we got to discuss as a team the retirement plan that our employers offer and how they differ. With this discussion, we were able to see how the plans differ and determine the things that we like and do not like about each of these plans. As a team, we have decided to go with the retirement plan that Samantha’s employer offers. They offer both a defined benefit plan (pension) and a defined contribution plan (401K). We will go over some of the plan features, fees that could be associated with the plan and how they are paid, the types of investments available, if there are any other features and opportunities, and go over the strengths and shortcomings of the plan.

Types of Plan Features

There are many features associated with both the defined benefit plan and the 401K plan. In order to be eligible for the defined benefit plan, you must have completed a year of service, attained age 21, and have completed more than 1000 hours. Once these requirements are met, you will be entered into the plan automatically on the first day of the month on or after becoming eligible. With the 401K plan, you become eligible if you are 18 or older. You are able to join the 401K plan at any time during employment, starting the first of the month after your first day of employment. Once you have been employed for five years, you then become fully vested in the 401K plan. What this means is that at this point you are able to withdrawal the total account balance, as you are fully vested at this point.

Fees

The fees that are associated with the plan are a management fee. The fee is 1% of the holdings no matter the amount of trading that is part of the plan. The fee is paid every quarter of .25% of the plan. This allows for a bigger fee to be paid if the plan is doing well but a smaller fee if the plan is not doing well.

Available Investments

This plan is like most 401K plans, in that the employee can invest in indices such as large-cap stocks, mid-cap stocks and small-cap stocks, as well as foreign stock, bonds and money markets. Large-cap stocks, mid-cap stocks and small-cap stocks are classified by the value of capitalization the company has in the market. Large-cap stocks have $10 billion in the market. Mid-cap stocks have $2 billion to $10 billion in the market. Although there is a number associated with mid-cap stocks, there is no real defined market value. Small-cap stocks have $300 million to $2 billion in market value. The next possible investment available is foreign stocks. Foreign stocks are usually made up of some of the best Chinese, European and emerging market stocks. Bonds that most 401k plans allow are medium-term bonds. These bonds usually have a maturity date ranging from two to ten years. The last option most 401k plans allow are money market funds. Money market funds are made up of investments such as U.S. T-bills and commercial paper. These considered the some of the safest investments and therefore have some of the lowest returns. Most 401k providers would recommend a mix of these investment options to safeguard an employee’s retirement investment.

Other Features and Opportunities

As we have seen, there are many features and opportunities with the 401K plan in particular. One of the best features of the 401K plan is that you can elect any amount from your salary to contribute to this plan. If you elect to have at least 5% contributed, then the employer will match the contribution. This is a great benefit because you are then adding more money to your retirement without you having to contribute all of it yourself. You are also able to adjust the amount being contributed at any time during employment, so if you start to make more money, you can elect to have more put towards your 401K, thus creating a higher retirement balance in your account. Another great feature is that you can choose how your money is being invested. You can choose whether you want to be conservative, moderate, or risky with the investment options. Making adjustments to your investments as you get older with the company, can create more of an opportunity for you to create higher balances in your 401K retirement account.

Other benefits that a 401K has that is not available with most other plans as that one can take it with them and it does not have the limitations of more traditional plans. Because the money is invested by the employee, you are able to have more flexibility with the money that is invested. There is more of an opportunity to make more money as the money is invested as you see fit and you chose options based on the risk you want to take. There is information provided by the Mutual Fund companies that typically hold the 401k Plans to assist in making sure that you make wise investments.

Conclusion

The retirement plan that we are offering can be started once you are 18 years of age. You need to be at least 21 with 1000 working hours for it to be fully vested. The fees that are paid are quarterly at .25% a quarter and amount to a managed fee of 1% a year. The retirement plan can match if you contribute at least 5%.

References

Calculator Soup. (2019). Rule of 72. Retrieved from https://www.calculatorsoup.com/calculators/financial/rule-of-72-calculator.php

 TIAA. (2019). Longevity Game. Retrieved from https://www.northwesternmutual.com/longevity-game/

TIAA. (2019). Retirement Advisor. Retrieved from https://shared.tiaa.org/public/publictools/advice/setYourGoal