Companies cutting 401k Matches due to Recession

Companies cutting 401k Matches due to Recession

As the recession continues to plague our economy, the next shoe to drop may well be your employer match on your 401kplan. However, there are many things to think about when planning for your 401k strategy.

About 84% of companies in the U.S. offered employees a 401(k) match as of last year.
However, cash strapped companies, reducing or eliminating the retirement contribution may be one way to cut back on costs and save jobs during hard economic times.

Frontier Airlines already announced that it was suspending its matching contributions to 401(k) plans earlier this year. Struggling automakers General Motors and Ford, as well as Dollar Thrifty Automotive Group and real estate firm Cushman & Wakefield also announced they would no longer be offering employer matches.

Any well-drafted 401(k) plan allows the employer discretion to change the company’s matching policy at any time. Whether that cost saving measure will catch on has yet to be determined. Just 2% of companies reduced their employer 401(k) or 403(b) matches this year, and only an additional 4% said they plan to do so in the next 12 months.But going forward, some experts say the trend could spread as more companies look to cut costs.

Don’t stop your 401k Contributions!

For workers who do get their 401(k) match cut, that does not mean they should also stop contributing, 401k Planning experts say. Even without the contribution from your company, there is still an advantage to socking money in a 401(k), and that’s the tax savings — your contributions come with an immediate tax deduction as well as tax-deferred growth.

However, employees shouldn’t necessarily bulk up their contributions to compensate for their employer. Instead, individuals should also aim to build up some cash reserves to cover a few months to a year of living expenses in anticipation of layoffs or other financial hardship.

In addition to 401(k) contributions, investors should think about putting money in a Roth IRA. Those under the age of 50 can make a maximum annual contribution of $5,000, which is not deductible but still grows tax-free and incurs no taxes when withdrawn at retirement. To qualify for a Roth, you must not exceed certain income limits.

Ultimately, investors should be more happy to be retaining their jobs during this difficult economic period. Most employers reinstate these matches in better times, so the removal of your 401k match may just be saving your job.

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I have to Rollover my 401k to an IRA, What do I do?

I have to Rollover my 401k to an IRA, What do I do?

A friend recently asked me, “I have decided to rollover my 401k into an IRA , What do I do? In speaking with him about the procedure, I decided that many people probably have the same thoughts about 401k  Rollovers, and are intimidated by making a move to an IRA. Here are some general thoughts about what you need to do to rollover your 401k.

If you have decided to hire a financial adviser, they should guide you every step of the way in the rollover process and make sure your 401k is properly rolled over and transferred to their firm.

How to Rollover your 401k to an IRA

The first thing you should do when rolling over your 401k is to find a new place for this money to be moved to. You should open a 401k rollover IRA account  at a discount brokerage firm , Mutual Fund or Traditional Brokerage company that will hold your account and act as custodian for the assets you own. Here are the steps to take to Rollover your 401k to an IRA:

1. Request and fill out a new retirement account application from the brokerage company of your choice.
2. When filling the application, make sure you specify that this will be a “Rollover IRA” account, not a regular IRA account.
3. Request and fill out an “Account Transfer” form from the same brokerage firm you are moving your account to. Make sure to indicate that this is a transfer from your 401k retirement plan , and should go directly to an IRA. Make sure to have your last 401k account statement handy. From this statement you will enter the name of the company that is holding your account in the “Transfer From” space. This not your employer. This should be a Fidelity, Merrill Lynch, or similar financial services company that has custody of your 401k money and securities. Under Account number/name you will have to enter the savings plan name on that statement. This is not your name. It should be your company’s named 401k savings plan.
4. Make a copy of the last 401K statement you received and mail the whole thing (New account application, transfer application, and copy of your last 401k statement) to the new brokerage company you chose.

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In some events, this may be all you need to do. But quite often and almost always, you may still need to contact your plan administrator and tell them that you want to Rollover your account in a trustee to trustee transfer. This will help to speed the process along.

In all events, you should establish an IRA rollover  account before you contact your plan administrator. You should take this action because your plan administrator will often send you an application request form that will ask you to specify the name of the institution that will receive your 401k rollover. You need to specify the name of the institution and the account number and title (Rollover IRA, example “Your Name” Rollover IRA).

After receiving your withdrawal request form, the administrator will either directly deposit the funds in your new account at the financial institution you specified or (most probably) send you a check for the value of your account made out in your name and the name of the Financial institution. For example if you chose a Fidelity 401k as the brokerage firm to hold your account, then the check will be made out to Fidelity 401k Administrator FBO Jane Doe Rollover IRA. FBO stands for “the benefit of”.

With the check in your possession, you should mail it along with a deposit slip or any other document indicating your account number at Fidelity for example. It is strongly recommended that you send it in certified or other traceable mail format with return receipt requested. You certainly don’t want that check to get lost in the mail.

Please keep in mind that 401k Rollovers to IRA plans can easily take between two to four weeks.

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It’s Official, We are in a Recession

It’s Official, We are in a Recession

Well, you can stop wondering. It took seven economists 11 months to decide what should seem obvious given all the foreclosures, bank failures, stock market  losses, and layoffs - the United States is officially mired in a recession.

Still, Monday’s declaration by the National Bureau ofEconomic Research that the economy has been in retreat since last December sent Wall Street into a bearish fit that knocked nearly 9 percent off the S&P 500 index on Monday. Experts also believe that this severe recession will last well into 2009.

This is the second time the bureau has declared an economic slump during President Bush’s eight-year tenure. It previously declared the U.S. in recession from March to November 2001 in a decline brought on by a stock market crash that struck Silicon Valley exceptionally hard.

The bureau made a subtle but significant shift in declaring the 2001 downturn and the one now under way as recessions. In both instances, it placed more weight on declines in payroll employment and real income than in the past. The traditional definition of a recession had been two quarters of declines in the gross domestic product.

Many economists believe the current downturn could be the worst since the recession of 1980-1982, when the U.S. unemployment rate soared above 10 percent. The nationwide jobless rate is currently 6.5 percent.

The bureau’s cautious approach can have big political ramifications. Not until December 1992 did it declare that the 1990 recession had ended in March 1991 - well before Bill Clinton drove the first President Bush out office with his “It’s the economy, stupid!” mantra.

Here is what a few of the pundants had to say about the news:

US Treasury Secretary Henry Paulson said treasury is actively involved in developing new programs to strengthen lending . It will discuss these programs with the Congress and the new administration and is still examining foreclosure mitigation ideas. Journey ahead is going to be difficult, he added.

Paulson said, “Today we continue to work through a severe financial crisis. While we are making progress the journey ahead will continue to be a difficult one. But I have confidence that we are pursuing the right strategy to stabilize the financial system and support the flow of credit  into our economy. We expect banks to increase their lending as a result of these efforts and it is important that they do so. This lending won’t materialize as fast as any of us would like. But it will happen much faster as confidence is restored as a result of having used the tarp to stabilize the system and to strengthen the capital in our banks.”

Ben Bernanke, Chairman, US Federal Reserve said, “Regarding interest rate policy although further reductions in the current federal funds rate target of 1% are certainly feasible, at this point the scope for using conventional interest rate  policy to support the economy is obviously limited.”

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401K Loans and Hardship Withdrawal Rules

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401K Loans and Hardship Withdrawal Rules 

401k retirement  plans are intended to grow tax-deferred continuously (without any withdrawals) up until you hit retirement age. However, we don’t live in a financially perfect world, especially with impending recession and financial crisis of 2008. Things may come up that require you to have immediate emergency funds for example death of spouse, big medical bill, etc. In such an event, yes you can withdraw money from your 401k retirement account.

401k Loan Benefits:

The main benefit of acquiring a loan from 401K Plan is that the proceeds of this loan are exempted fromtaxes and penalty fee, barring the default cases. There are no restrictions or firm guidelines on the use of loans acquired from your 401K plan . However, some plan administrators have put restrictions like number of outstanding loans  and minimum balances of loan. Basically, companies do this to decrease administrative costs. Some companies/plan administrators ask the employees to obtain consent of their spouse, if they are married, before obtaining the loan.

Limits of Loan from 401K Plan

When is a 401K loan  a good solution? The basic stipulations of 401K borrowing allow you to borrow up to 50% of your account balance up to a balance or $50,000, whichever is less. You are usually required to pay this back within a period of 5 years, unless it’s for a 401K  mortgage for your first home in which case you have a longer payback period. There is some prudence you need to exercise when making this decision. A 401K hardship withdrawal is a valid approach so long as it is not a distribution. There is a 401K penalty on early distributions.

Interest on 401K Loans

The statues that govern 401K loans do not place any restrictions on what the money can be used for expect that the loans must be made reasonably available to all individuals. In reality, an employer can restrict the reasons for loans. In some businesses, loans are restricted for the purposes of preventing home eviction, paying educational expenses, paying medical expenses or for the purposes of buying a first time residence. Most employers offering 401K loans will restrict the number of loans. Generally, the loanamount  is deducted from the paycheck each week and the loan interest rate  is set at the prime rate  plus 1%.

What to Think About Before Taking a 401k Loan.

There are other factors to consider for 401K loans. If you are planning to leave employment, often the unpaid loan will be distributed as income . The amount could then be subject to income tax  and you could suffer the 10% 410K penalty. Another factor to consider is that you can be effectively losing interest. Payments to satisfy 401K loans come from after tax dollars and any amount you contribute to the loan has an opportunity costs associated with lost investment or interest earning activity.
There are many advantages to borrowing from 401K loans. There is no need to go through credit checks and the application process is minimal. You will automatically be entitled to the loan provided it is within the established guidelines. When you pay back the interest you are effectively paying yourself and the interest is tax sheltered . You don’t pay interest on the loan until retirement.

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Tips for Safe Investing

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Tips for Safe Investing

Tips for safe investing are always one of the main things that investors are interested in learning. When deciding what kind of investments  to use there is a few things to consider. Is the investment safe? To what extent are you willing to accept risk? Especially in this volatile stock  market, it is very hard to commit to putting your money in that sector; however, there are many things to consider. If you are looking for a safe investment look at the account types below.

Also, please keep in mind that we are not going to discuss any sort of bond or preferred stock. Many people do not realize this, but they have the possibility to incur dramatic losses. With this article, we are going to stick with the safest of investments.

Money Market Accountsare usually Federal Deposit Insurance Company  (FDIC) insured  which means that they are guaranteed to retain their value and nothing can happen to your investment. The downside of this type of investment is that there are no huge gains possible like that in Direct Investment (in stocks); however, Money Market Accounts  (MMA’s) offer competitive interest rates sometimes higher than four percent. If you are interested in a guaranteed return on your investment and have a substantial pocket of money you are willing to invest you should look into Money Market Accounts. They also sometimes have penalties for taking out money, one should read the fine-print of any of these kinds of arrangements. One example of a high yield money market account is from ING DIRECT - High Yield Savings with 2.75% annual percentage yield!

Certificates of Deposit  guarantee a high interest rate of interest that is guaranteed by the FDIC of the Federal Government but requires that you leave the deposit with the company for a sizable amount of time which varies from months to years. If the money is pulled out of Certificates of Deposits early there are penalties, usually the latest three months of interest but this varies from bank to bank.

Savings Accounts are traditional that usually have a small minimum deposit and offer a reasonable interest rate that may or may not beat inflation. These investments are super-safe and practically as good as liquid cash. Sometimes there are fees for over-utilizing the account but they are usually minimal. A good example of a savings account is a deal like ING is offering currently where you can-earn 2.75% annual percentage yield with the Orange Savings Account - No Fees, No Minimums & No need to change banks! FDIC Insured.

If you are interested in finding good interest rates on any and all accounts listed here, I suggest looking at www.bankrate.com. This site allows you to look at the comparative interest rate of various banks in your local area or on the web. It also lists any bonuses attached to the account, some banks want you to open an account and will offer fiduciary rewards for starting and keeping an account with them. It is worth looking at.

I hope that these descriptions will open you up to the world of banking and that you will be able to save well with your comfort level. Remember anything that is not FDIC insured is not guaranteed and can lose value.

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How to Shop for Life Insurance

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HOW TO SHOP FOR LIFE INSURANCE

In order to be able to shop for the best premiums, it’s a good idea to know how premiums are calculated by insurers. Bear in mind that premiums vary among insurancecompanies, and it is a good idea to ask several insurers  for their rates.

Insurance companies place individuals into four risk groups: preferred, standard, substandard, or uninsurable. The premiums charged will be commensurate with the category you are placed in. Thus, a standard risk will pay an average premium for similarly situated insurers.

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If you have a high risk job or hobby, you will be considered substandard, a high risk. A terminal illness at the time you apply for insurance will render you uninsurable. Having some type of chronic illness will place you in the substandard category. People with conditions such as diabetes or heart disease can be insured, but will pay higher premiums.

TIP: One company’s category for you may not hold with another company. Thus, it still pays to shop for insurance with other companies even though one may have labeled you “substandard.”
TIP: Once an insurance company approves you for coverage, you cannot be dropped unless you stop paying your premium.

SHOPPING FOR A POLICY

In most states, there are rules, set by a group of state insurance regulators, requiring the agent to calculate two types of cost indexes that can help you to shop for a policy. You can use the indexes to compare policy costs.

One type of index, the net payment index, gauges the cost of carrying your policy for the next ten or twenty years. The lower the number, the less expensive the policy. This index is useful if you are most interested in the death benefit aspect of a policy, as opposed to the investment  aspect. The other type of index, the surrender cost index, is useful to those who have a high level of concern about the cash value. This index may be a negative number. The lower the number, the less expensive the policy. These two indexes apply to term and whole life policies. With universal life policies, focus on the cash value growth and the cash surrender value to make comparisons. Cash surrender value is the amount you receive if you cancel the policy. It is not the same as cash accumulation value. If you are shown two universal life policies, and they have the same premium, death benefit, and interest rate, then the one with the higher cash surrender value is generally the better policy.

Be aware that the projections of cash values given by some insurers may use unrealistic assumptions, and therefore might be misleading.

Here are some questions to ask about policies:

How do cash values accumulate? An early, rapid build-up is generally preferable.
How has the policy’s cash value performed in the past? You can get this information from a publication called Best Review, Life and Health. Determine how the policy performed in comparison with the company’s projection and with other insurers.

Are any special features merely bells and whistles, or do they add value for you?
What is the company’s rating with Best, Standard & Poor’s, and Moody’s? You can find these publications in public libraries. The rankings should be in the top three to ensure that a company has financial stability.

Planning Aid: To view rating information on-line, see Standard & Poor’s Rating Service

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