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What the New 401(k) Rules Mean for You


If it weren't for our 401(k)s many of us would be up the retirement creek without a paddle. This year, there are some noteworthy changes to 401ks. Here's what you need to know to take advantage of them.

For one thing, there are higher contribution limits for 2012. You can sock away $17,000, up from $16,500 in 2011, in your 401(k), 403(b) and the federal government's Thrift Savings Plan. However, catch-up contribution limits for those 50 and over stand still at $5,500.

Every dollar you contribute to your 401(k) or other employer-sponsored plan is tax-deductible. The more you contribute, the smaller your tax bill.

Another change that's all the chatter, is the rules requiring increased transparency around fees. "Better fee and conflict of interest disclosure will finally put buried costs and hidden relationships on the table for all to see and compare," says Jeff Acheson, a partner with Schneider Downs Wealth Management Advisors. "Daylight will be a great antiseptic and help prevent egregious fees and self-serving relationships from inhibiting the realization of satisfactory compound rates of returns within participants' account."

In the era of double digit returns, fees that were higher than industry standards were not a focal point as they were considered non-consequential and offset by high rates of return, he argues. But now, facing a period of time where investors' account performance may very well be measured by single digit results, the difference in fees may well make all the difference between achieving satisfactory outcomes or retiring with inadequate resources. "High fees that are undetected within complicated legal documents and products are a bit like undiagnosed high blood pressure, initially you don't necessarily see or feel, but the affliction over time if left untreated, it will kill you," says Acheson.

The hope is that transparency will lead to more competitive pricing, improved investment selection and lower fees, points out Mitchell Kauffman, a certified financial planner with Kauffman Wealth Services. Fees are huge in the retirement savings equation. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account. The following example from the U.S. Department of Labor demonstrates how fees and expenses can impact your account. Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

There are a lot of unknowns regarding the new disclosure rules, but what is clear is that service providers for plans will now be more exposed than ever in terms of what they are charging. The results of this 'exposure' are yet to be seen, says Holly Danzinger, a pension consultant with Karel-Gordon & Associates.

However, plan participants will not see a full comparison of plan and investment fees until November.

Remember too, that while fees are important, there are other considerations. "The fee should not be your biggest concern. The returns should be. A poorly performing return with a low fee, is worse than a higher fee on a screaming return," says Grant Cardone, author of The 10X Rule: The Only Difference Between Success and Failure.

There is also a proposal that would allow workers to convert a portion of their 401(k) savings into an annuity, and also allows for the creation of a "longevity annuity" for retirement savings. With a "longevity annuity," also know as "deferred fixed annuity," retirees can take part of a lump sum distribution at age 65 and defer it for 20 years. That could save them an enormous amount of money, says Ty J. Young, president of financial advisory firm Ty J. Young. Converting a portion of a 401(k) to an annuity, could go a long way in dealing with the very real prospect of outliving your money.

So what can you do now? Employers will still have control over these decisions, but you can make your voice heard about fees and ask more questions. You can also do a little homework on your own. Brightscope is an independent provider of retirement plan ratings and analysis, you can get a report now to see how your plan stacks up. Take advantage of any financial education offered by your employer or push them to provide such services. Mostly though, max out your investment, especially if you're over 50.

There's much change on the horizon. Be ready to capitalize on them.


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Anonymous   |     |   Comment #1
401 contribution tax deferred, not tax deductible
Anonymous   |     |   Comment #2
Anon #1 not quit correct.

Tax deductible in current tax year.  Of course tax the crap out of you later is a possibility.
Tanya   |     |   Comment #3
If Person #1 has assets of $1 million, of which $575,000 is in 'tax-deferred' 401ks, and Person #2 has assets of $1 million with none of it 'tax deferred,' who has the higher net worth?  A question from my financial planning class.  Readers help?
Anonymous   |     |   Comment #4
Tanya, this is again dependent on future tax structures. 

Under current structure person #2.  That person is only taxed on investment income.

If a VAT both are ****ed, but #1 is richer if VAT replaces income tax.
Anonymous   |     |   Comment #6
Tanya, this is a dumb question, without explaining in what the preset assets are invested.

If I have a Million, I may be able to shelter it all and may not pay a tax at all and may outperform the 401k forever.

Your question sounds too primitive and trivial, there is no right answer for either case.
The Olson Family, NY
The Olson Family, NY   |     |   Comment #8
Dear Ms. Sheryl Nance-Nash,

We actually like all your articles and find them informative and well-written.  We print them out and discuss them, and I bring them to the 11th grade Business Eco. class which I teach here on Long Island.  We have also seen your work in Newsday -- congratulations on that!  Don't even mind what others say -- you rock!  Ken:  Keep them coming from Ms. Nance-Nash!


The Olsons/Long Island, NY
Anonymous   |     |   Comment #9
To #1 And #2...

You are both incorrect ...The Money Is Tax Defered , and Than IF There is ANY Left It Will Then Be Taxed..Proberly at a MUCH HIGHER TAX RATE...
Anonymous   |     |   Comment #10
To Tanya (anonymous) - #3,

There is no right or wrong answer to your question, it is too trivial and not enough info to compare both cases.
If I invest my $1million in tax free investments and 401k in low paying CD,  $1million investment wins on long or short time period.
If I invest my $1million in corporate debt, I will only pay 15% tax on it and can double it in 8-10 years even after the taxes, on the other hand 401k will be taxed at regular income scales and may lose value on long run.
The variables are endless and can not all be explained here.
My advise to you is, to be more specific if you want right answers, otherwise it becomes a guessing game and is too hypothetical to even start to discuss it.
Anonymous   |     |   Comment #11
Tanya's question is a simple one re: Net Worth.  Why is no one really just answering the question?????  She isn't asking which is the wiser situation.
Anonymous   |     |   Comment #12
To Anonymous - #11,    Re: Tanya

Can you answer me:

Which is better, an apple or an orange, without any further knowledge or input or conditions.

If you know the answer to the above, then you can answer Tanya question, otherwise you are as dumb as Tanya or you are Tanya pretending to be someone else.
Pablo   |     |   Comment #13

For some reason, there is a lot of hostility and nastiness on this site lately, i.e., #6 and #12.  We hope you consider deleting them.
Anonymous   |     |   Comment #14
To Anonymous - #11,

Net worth is a variable and can not be answered with simple yes or no since the net worth comes in unlimited forms and shapes and the valuation changes daily.
Somebody has net worth of millions in real estate but is totally broke on a day to day living.
Net worth is not a measure of wealth, period.
You can not answer such irrelevant question like Tanya, as you requested.

NET WORTH OF WHAT????????, Money, stocks, bonds, cash, real estate, business, in trust, and so on, then are they liquid, present value, future value, redeemable, or not, are tax due on sale and so on and son on.....
Net worth has no present value until the investments are liquidated and deposited in an account after all taxes are paid.

I’ll ask you again:
NET WORTH OF WHAT????????,,,,vintage cars, or wine cellar of  French wine.
Anonymous   |     |   Comment #15
To Pablo (anonymous) - #13

Get life and don’t read what is not to your taste.
Tanya   |     |   Comment #16
All of you are making this much more complicated than it needs to be.  Assume the assets are all cash/bank acc'ts./CD's/easily sold stocks, etc.  Then let's just answer the question.  #11- you're reading too much into it.
Porcelanosaito   |     |   Comment #17
Number #11 must have some anger/agression issues, i.e., capital letters, etc..  The girl asked a fairly simple question.
Anonymous   |     |   Comment #18
# 17 please review your post and make sure that the poster # you referred to is correct....if it is, then.......?
Anonymous   |     |   Comment #19
I believe people are aggravated and may be showing more "aggression" and less patience today when the topic related to interests rates on savings and CDs comes up simply because we are all frustrated with the current situation.  And unfortunately, the interest rates being offered to us frugal savers doesn't look any better in the foreseeable future.
Porcelanosaito   |     |   Comment #20
I stand corrected -- I was referring to Poster #14 as the jerk.  Sorry!
Stacy   |     |   Comment #21
To #19:

I understand, but we should all be civil to each other and not vent venom due to frustration with the rates.  There's really no excuse for some of the nastiness on this site lately. JMHO.

Hellen   |     |   Comment #22
Porcelanosaito (anonymous) - #20 wrote:

“I stand corrected -- I was referring to Poster #14 as the jerk.  Sorry!”

I read the poster #14, and he or she is correct in the observations.

Tanya’s original question was to compare assets, now she is changeling the question to cash, after the fact, when she realized that asset is wrong metaphor for her question or may be now she just learned what asset means.

I don’t know about you, but I think you may be the kind of person what you are referring to $14 to be.
Eleanor, CFP, FLA.
Eleanor, CFP, FLA.   |     |   Comment #23
#22 is incorrect, Tanya is correct.  'Asset' is the correct term for the question which she is asking.  I think #22 should stick to working on her spelling ("changeling") and English grammar (her last sentence) instead of second-guessing financial planning students.  ("They who live in glass houses...").
Anonymous   |     |   Comment #24
TO TANYA....The answer is the same at this point in time....
Anonymous   |     |   Comment #25
There are things about 401Ks we all need to know about, particularly those potential changes on the horizon thanks to greedy politicians from D.C., swooping in like vultures to take what you have earned when you are gone.  Distribution rules for heirs, in particular, for the children of deceased 401K and IRA owners, would change from "over their lifetimes" permitted under the current Tax Code to within 5 years of the death of the account owner.  This would get the revenue from the accounts taxed quicker and perhaps make it higher since the heirs would probably be pushed into higher tax brackets.   In this person's opinion, as well as articles I have read, there are over $4 trillion in retirement accounts, and our government can't wait to get its greedy hands on what does not belong to them.   They simply cannot stand people owning their own assets and passing them on to their children when they are gone.   Needless to say, today's children may not be able to have the lifestyle of their parents.   So if the parents want to leave them something, as long as the Tax Code is followed, there should be no complaints.   Well, Congress wants to go back on its word.  Sen Baucus, chairman of the Senate Finance Committee, already just tried to attach an amendment to a transportation infrastructure bill, S. 1813, changing the distribution rules.   There were so many complaints, it was reported he did an "about face."   The amendment is in limbo for the time being it has been reported. Sen. Baucus did say,  however, that Congress will look to change the rules when Tax Reform is discussed again.

For those of you who think the annuities are such a great idea, a few years ago, there were suggestions from the government that there should be "mandatory annuities" from retirement accounts.   There were many complaints and so I guess a new tactic is to be used --- make it voluntary at first --- then down the road, change the rules and make it "mandatory."

This advice is coming from a senior saver who has experienced Congress' efforts to get us to save for retirement --- both the ups and the downs over a period of many years.

I haven't heard anyone discuss the Executive Life Insurance bankruptcy of the early 1990's.  Those interested can easily do a search online.   It was a very big news item at the time and affected many people across many states throughout the country.   This individual's spouse's former employer, a very large well known corporation, offered Guaranteed Investment Contracts from Executive Life Insurance Company earning around 9% to 10% a year.   The interest rate was not considered unusually high at the time, as other investments paid even higher rates.  It was billed as the "safest investment in the 401k."  Then it went belly up.  Individuals who had invested in it lost a large chunk of their investment if the state you lived in did not have strong enough rules to protect you.   One choice offered to those losing was to leave the principal remain frozen (drastically decreased in value) and wait for many years --- at least 10 to 15 I believe, to get pieces of the original investment returned ---  all the while the frozen balances earning no interest.  This was not a great deal for the so-called "safest investment in the 401K plan."  For my family it was a most painful experience!

So the credit worthiness of the insurance company matters a lot as well as the protections provided by State Insurance Departments.   Ordinary people lost a lot of their retirement savings, whether it be through initial principal lost or frozen balances earning no interest for many years.   A lesson was definitely learned!    At least we were young enough at the time to save in other ways for our future retirement.   How about those who were almost at retirement age.   They got a lousy deal!

So what can the individual expect from the "annuities" offered.?  Other readers have already pointed out that their ability to pay off on the annuity depends on them not going bankrupt!  In addition, when the account owner dies, there is nothing left to pass on if the account owner wanted to provide for anyone after his/her death.

I believe the individual should no longer rely on what our government offers as carrots to get us to save for retirement.  As you can see, the government looks to go back on its words when it suits them.   They see this pile of money in retirement fund accounts and they just plain and simple want it!   The individual needs to make up his/her own plan --- with contingencies --- for changed rules now and into the future.

Eleanor, CFP, FLA.
Eleanor, CFP, FLA.   |     |   Comment #26
RE: Poster #25:

Anonymous   |     |   Comment #35
I'm glad the TSP costs are so low (0.025% in 2011).  That allowed my investment balances to recover from the market downswings in 2000-2002 and in 2008.

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