Agenda
• Review Exams
• Talk about Applied Knowledge and Goal
moving forward
• Overall Goal of a 401 (k) Plan
• Company Responsibility
• HR Responsibility
• Individual Responsiblity
• Exercise
401 (K) Basics
What you should and need to
know!
What is a 401 (k) Plan
• Enron crash and people running around
saying 401 (k) was a bad idea
Retirement
• Defined Benefit Plan For example State
Retirement System based on last 3 years
salary average * the number of years of
service as a percentage
• Defined Contribution Plan—401k
• Typical match is 50 cents on the dollar up
to 3%
Defined Plan
• Very expensive
• Retirement of the past
• State System
Defined Contribution
• Employee stock ownership—company
allocates number of shares to employee
• Deferred profit sharing—company
contributes an amount of profits each year
Company Makes Decision
• Decides to Offer
• Decides on Matching Contribution
• Decides on Safe Harbor v. Regular
• Create a 401 (k) Committee
• Picks Provider
– Very important to document provider choice
Chief Duties of Retirement Plan
Committees
• ADMINISTRATION
• Design plan.
• Choose and monitor third-party record keepers, other service providers.
• Ensure government compliance.
• Amend plan document as needed.
• Handle employee communications.
• Decide benefits claims and appeals.
• Provide for financial education.
• INVESTMENT MANAGEMENT
• Write and ensure adherence to investment policy statement.
• Choose specific investments or recommend them to full committee.
• Hire and monitor investment managers, other service providers.
• Review investment performance and make changes as needed.
404C Compliance
• Very Critical to HR Field
• Erisa Section 404 (C) provides limited
fiduciary relief to plan sponsors, assuming
participants can exercise control over their
accounts.
• EMPLOYERS MUST EDUCATE BUT
CAN NOT GIVE INVESTMENT
GUIDANCE AND/OR ADVICE
Investment Policy
• State what the overall goal of the company
is in offering the 401 (k) and how it will be
administered
• Should have an investment committee
See sample Fiduciary Service
Timeline
Good Advice from HR Magazine
about Committee Responsibility
• These nuts and bolts of setting up and
running a committee may not be
glamorous, but the devil is in the details.
Following the three P’s—prudence,
process and procedure— can result in a
well-functioning committee that provides
the best retirement plan for participants
while insulating top executives from legal
liability.
Welcome
What we’ll cover today
• Info
– Why save and the benefits of your plan
• Process
– How to make the plan work for you
• Your role
– What you need to do
Introducing Today
Process Your RoleInfo
Social Insecurity?
InfoWelcome
BenefitsWhy Save
Process Your Role
Source: Social Security Administration, 2006 OASDI Trustee Report
2005
workers per Social
Security Recipient
2030
workers per Social
Security Recipient
1940
workers per Social
Security Recipient
Social Insecurity?
• People are living longer
• Most likely, you will enjoy
20-30 years of retirement
Did you know?i
Benefits
Process Your RoleWelcome Info
Why Save
According to the .
Census Bureau, in
2005 there were over
70,000 Americans age
100 and older.
This is expected to
increase to million
by 2050.
Your company matchi
The company makes
a $ contribution
to your account
For every dollar you
contribute up to 6%
of pay
Vesting schedule
• Your entitlement to the
employer’s contribution portion
of your account
– You are immediately Vested 100%
Now add the match
[100%]
30
years
10
years
20
years
$31,824
$102,590
$259,947
Assumes a $20 weekly contribution, 100% match, and an 8% annual return compounded monthly
This is for illustrative purposes only and not meant to represent the return of any of your plan’s
investment options. Your situation will vary.
Lower current taxable
income
annual base wage
pretax contributions
pay subject to income tax
tax**
Social Security
regular savings
spendable income
Ed’s 6%
Regular
Savings*
$25,000
0
25,000
-3,750
-1,913
-1,500
$17,837
Jane’s 6%
Plan
Savings
$25,000
-1,500
23,500
-3,525
-1,913
0
$18,062
Jane’s taxable
income is
lower, resulting
in $225 more
in spendable
income than Ed
*An investment in a savings account at a bank may be FDIC insured; an investment through
the plan is not.
**This example assumes a 15% tax rate.
This is a hypothetical example for illustrative purposes only, your situation will vary.
No taxes along the way
Both invest over a 30-year period, assumes an 18% tax rate, earn an 8% annual return,
compounded monthly.
Taxes are taken from the 401(k) account upon withdrawal.
This is a hypothetical example for illustrative purposes only and not meant to represent the
investment return of any of your plan’s options. Your situation will vary.
PAT
$100/month
401(k) plan
CHRIS
$100/month
taxable account
outside the plan
$150,030
$117,955
Year Year
1 30
Flexible withdrawals
• Termination of service
• Retirement
• Financial hardship
Withdrawals prior to age 59½ may be subject to a 10% penalty tax
unless rolled over to an IRA or eligible employer plan.
Plan contribution limits
• You can contribute 1 - 100% of
your pay pretax up to $17,500
for 2013
• If you are age 50 or over, you
can contribute
an additional $5,500 into the
plan for 2013
T. Rowe Price Retirement
2030
• Bond Funds (%)
– T. Rowe Price New Income Bond Fund (%)
– T. Rowe Price High-Yield Bond Fund (%)
• Stock Funds (%)
– T. Rowe Price Equity Index 500 Fund (%)
– T. Rowe Price Growth Stock Fund ()
– T. Rowe Price Value Fund (%)
– T. Rowe Price Mid-Cap Growth Fund (%)
– T. Rowe Price Mid-Cap Value Fund (%)
– T. Rowe Price New Horizons Fund (%)
– T. Rowe Price Small-Cap Stock Fund (%)
– T. Rowe Price Small-Cap Value Fund (%)
– T. Rowe Price International Stock Fund (%)
– T. Rowe Price International Growth & Income Fund (%)
Investors should note that the higher the fund’s allocation to stocks, the greater the risk.
Choose a Retirement Fund
InvestingSaving
Info Process Your RoleWelcome
• OR, just pick the fund that matches the year in which you plan to retire
• As a guideline a retirement age of 65 is assumed
If you were This Retirement Fund
born… May Be Right For You…
In 1973 or after Retirement 2040
1968 1972 Retirement 2035
1963 1967 Retirement 2030
1958 1962 Retirement 2025
1953 1957 Retirement 2020
1948 1952 Retirement 2015
1943 1947 Retirement 2010
1938 1942 Retirement 2005
In 1937 or before Retirement Income Fund
Decide how to invest
• One-step Retirement Funds, or
• Choose-your-own mix based on
your time horizon and risk profile
Select a mix
InvestingSaving
Info Process Your RoleWelcome
Decide how to invest
• Time
– Know your investment horizon
• Attitude
– Assess your feelings about risk
• Goal
– Determine how much you need
Did you know?
Check your TAG
You can see how you’re
doing by completing the
retirement planning
worksheet available
on our Web site
InvestingSaving
Info Process Your RoleWelcome
Example: Pat chooses a mix
• Pat’s Time
– 6-10 years from
retirement
• Pat’s Attitude
– Moderate-risk
investor
• Pat’s Goal
– To own a small
business in
retirement
Stocks
60%
Bonds
30%
Money Market/
Stable Value
10%
InvestingSaving
Info Process Your RoleWelcome
Money
Market/
Stable Value
What are my investment
choices?
Bonds
StocksHigherRisk &
Return
Potential
Lower
Risk &
Return
Potential
i
InvestingSaving
Info Process Your RoleWelcome
An investment in this fund is not
insured or guaranteed by the FDIC
or any other government agency.
Although the fund seeks to preserve
the value of your investment at $
per share, it is possible to lose money
by investing in the fund.
T. Rowe Price Prime
Reserve Fund
Did you know?
//bp213/sysba3/SHRDATA/Enrollment/PRESENTATION EXCHANGE/Final Links/Fund sheets/TRP Fund Fact Sheets/Money Market Funds/
//bp213/sysba3/SHRDATA/Enrollment/PRESENTATION EXCHANGE/Final Links/Fund sheets/TRP Fund Fact Sheets/Money Market Funds/
How do I choose my
investments?
• Which of these best describes your
situation?
– Age 20-35, starting a career and family, 5
saving for major purchases
– Age 30-50, saving for children’s college, 3
paying for your home
– Over age 40, with children grown and 1
on their own, trying to save as much
as possible for retirement
Look at your risk profile…
How do I choose my
investments?
• When it comes to investing for
retirement, would you consider
yourself a knowledgeable investor?
– No 1
– Somewhat 3
– Yes 5
Look at your risk profile…
How do I choose my
investments?
• You’d feel best if you made an
investment that:
– Doubled your money in the first year,
5
although it had an equal chance of
losing 50%
– Grew slowly but steadily 1
– Doubled your money in 10 years, 3
with less chance of loss
Look at your risk profile…
How do I choose my
investments?
• Your idea of a smart retirement
savings strategy is:
– You save as much as you can, don’t
take 1
chances, and hope you’ll have enough
– For the sake of getting the best long-
term 5
growth, you accept the risk of ups and
downs
– To earn returns that will keep you
ahead 3
of inflation, you live with moderate risk
Look at your risk profile…
How do I choose my
investments?
Add up your score…
You are a low-risk investor who
wants maximum stability for
your money
4–8 Low-risk
You are a moderate-risk investor
who likes balance between low-risk
and higher-risk investments
9–14 Moderate-risk
You are a high-risk investor,
comfortable taking substantial
risk in exchange for potentially
higher returns
15–20 High-risk
What is a Redemption Fee?
• A fee charged to investors who sell shares prior to the expiration of
the designated holding period
• Redemption fees are intended to protect the investment option,
and their long-term investors and will only impact investors who
sell shares before the expiration of the designated holding period
• Redemption fees are paid to the investment to help offset
transaction costs
• Some fund families, including T. Rowe Price funds, began
assessing redemption fees for retirement plan participation in
certain investments starting on January 1, 2005
• To see an updated list of investment options impacted by
redemption fees, go to
