Mid-sized Employer Meets Big 401(k) Goal

Thomas Automotive Family’s service department in Bedford, Pennsylvania.

When Peggy Zembower became the human resources director for Thomas Automotive Family about four years ago, she was dismayed that some long-time employees had never increased their retirement saving above the measly 1 percent of pay they’d started at.

One big issue was that the lowest-paid workers at the auto dealership – like low-wage workers everywhere – felt they couldn’t afford to save in the 401(k). A lack of knowledge about investing and a reluctance to give up control of their money seemed to frighten others out of saving, which meant forfeiting their employer’s matching contribution.

“It bothered me when I saw employees who’d been here five years and up and saw what small amounts they were investing,” she said. “Many lower-paid employees saved little or nothing.”

With her boss’ blessing, Zembower got to work.

Thomas Automotive is a mid-sized company with 280 full-time and part-time workers. Their earnings run the gamut, from employees in the service department earning $11 per hour (or about $23,000 per year) to car salespeople earning as much as $100,000, and Thomas Automotive’s owner, who has four dealerships in Pennsylvania and one in Maryland.

By doing the things retirement experts recommend, Zembower increased participation to 87 percent of employees, up from 53 percent. She did this by instituting automatic enrollment in the 401(k) at 4 percent of workers’ pay and auto-escalation, over time, of the amount saved. (Employees have the right to pull out or to maintain past contribution levels.) These techniques are far more common at large companies.

She goes further, re-enrolling all non-participating employees each April 1st, which requires them to revisit their decision before opting out of the retirement savings plan again.  “We have a few employees who feel we don’t have the right to do this,” she said, “but we do.”

One gets the impression when interviewing Zembower that it is not what she’s done to make the 401(k) plan work better.  It’s how she’s done it, with her gentle insistence that saving for retirement is best for the workers.  Sometimes this means she’ll ask a worker to wipe off his greasy hands and look with her at the retirement calculator placed front and center on the employee page of the company website. …Learn More

Medicaid: it’s Not Just for Nursing Homes

Medicaid serves millions of low-income Americans, many of them elderly. Federal spending on this program now approaches the dollars spent on Medicare, the primary health care program covering virtually all Americans over 65.  Many people confuse the two programs, or cast Medicaid as a program strictly for the poor.  Many are unaware of the financial support that it provides to seniors.

With major changes to Medicaid now being debated, Squared Away interviewed Diane Rowland, executive vice president of the Henry J. Kaiser Family Foundation, to learn just what Medicaid does.

Medicaid Basics Chart - Revised

Q. Describe Medicaid’s broad mission and how older Americans fit into that mission.

A. Medicaid’s basic mission has been to provide support from the federal government to the states to enable them to provide health and long-term care services to their low-income populations, which include seniors in many states. This includes both people who need assistance with long-term care, but Medicaid also helps one in five Medicare beneficiaries pay for their premiums and cost-sharing obligations under Medicare. In essence, Medicaid is the gap-filler for many of Medicare’s seniors, including seniors with disabilities who have low incomes.

Q. Virtually everyone over 65 enrolls in Medicare? So why do seniors need Medicaid?

A. Seniors need Medicaid, because over one-quarter of seniors have very low incomes. Medicare doesn’t pay for 100 percent of medical care, and some of the gaps in Medicare coverage are unaffordable for low-income seniors. They can’t afford Medigap policies to help with Medicare’s cost-sharing requirements. Many struggle even to pay their Part B premiums. One of the first roles of Medicaid – and over the 52-year history of the program – was always that the program was going to fill in the holes for seniors under Medicare. Medicaid’s other role is that Medicare does not provide a lot of the benefits that seniors need in nursing homes and in their communities. At one time, Medicaid also helped with prescription drugs – back when Medicare didn’t cover them. In many places, Medicaid will also help to pay for dental, eyeglasses and other services Medicare doesn’t cover. Essentially Medicaid has always been the wraparound for Medicare for both the benefits Medicare doesn’t cover and for the financial obligations that Medicare imposes on low-income people.

Q. Nearly two-thirds of nursing home patients are on Medicaid. This nursing home funding isn’t just for the poor, is it?

A. Medicare will pay for some nursing-home coverage immediately after hospitalization, but it does not include a benefit that helps people who need long-term assistance, especially people with cognitive impairment or Alzheimer’s or who need other services that require substantial help at home. Nursing homes are expensive – $90,000-$100,000 per year – so even if someone enters a nursing home with their own resources, they quickly spend that down. Once they spend it down, Medicaid picks up the remainder of their care. Many good, hard-working, middle-class seniors who retire – if they or their spouse need nursing home care – quickly become unable to pay the full cost of their nursing home stay, and that’s when Medicaid kicks in. …Learn More

Illustration of an online tool

Retirement Calculators: 3 Good Options

The Internet offers many free calculators to baby boomers wanting to get a better handle on whether their retirement finances are on track.

The operative words here are “on track,” because each calculator has strengths and weaknesses.  Calculators aren’t capable of providing a bullet-proof analysis of the complex factors and future unknowns that will determine whether someone has done the planning and saving required to ensure a financially secure retirement.

With that caveat, Squared Away found three calculators, listed below, that do a good job. They met our criteria of being reliable, free, and easy to use.  Many other calculators were quickly eliminated, because they were indecipherable or created issues on the first try.

Most important, each calculator selected covered the assumptions crucial to an accurate analysis. All ask such obvious questions as how much an older worker and spouse (or single person) have saved, their portfolio’s returns, and estimates of their Social Security and pension income.  The first calculator below asks how much money the user wants to leave to his children, and all three include the user’s home equity, a major resource that most retirees are loath to tap but are under increasing financial pressure to consider. Also, the first two ask more detailed questions – and are more time-consuming – than the third, which is the best option if you want just a rough estimate of where you stand.

Finally, this blog’s writer tested each calculator and compared the results with her personal adviser’s customized analysis. Each time, the outcomes were in the same ballpark as the adviser’s.  A fourth good option is to use the calculator provided by the financial company managing your employer’s 401(k) – most of the major providers offer them. …Learn More

pig

IRAs Fall Short of Original Goal

Nearly 8 trillion dollars sits in Individual Retirement Accounts, or IRAs. This is nearly half of all the value held in the U.S. retirement system, which also includes employer pension funds and 401(k)s.

A big reason IRAs were created in 1974 under the Employer Retirement Income Security Act (ERISA) was to give individuals not covered by retirement plans at work an opportunity to save in their own tax-deferred accounts.

So, are IRAs helping these workers?

IRAs “have drifted very far from their original intent” of helping those who need them most, researchers for the Center for Retirement Research conclude in a new study.

Who is eligible to receive tax benefits for saving in an IRA has morphed over the years since ERISA’s passage, but the original description is still relevant to millions of Americans: about half of U.S. private-sector workers today do not have a tax-exempt retirement plan at work. Low-income workers are even less likely to have one.

To determine who benefits from IRAs today, the researchers first tracked down the source of the trillions of dollars held in IRAs. Only 13 percent of the money that flowed into IRAs in 2014 was from people putting new savings into these accounts. The rest was from rollovers of funds accumulated in employer 401(k)s, which usually occur when a worker retires or changes job. (ERISA did delineate rollovers as a second purpose of IRAs.) …Learn More

Fourth of July

Celebrate the 4th!

Many of you are enjoying a long weekend or taking the entire week off. Enjoy your vacations and drive safely.

As the summer kicks into high gear, we’ll continue blogging twice a week about retirement and related personal financial issues.Learn More

needle in haystack

Mutual Fund Fees: Here’s What Matters

Investors will probably see good news in Morningstar Inc.’s annual report showing that the fees charged by actively managed mutual funds continue to come down.

The truth is that focusing on fees alone misses the point. What matters is a fund’s after-fee return. There are always fund managers who excel at picking stocks and can deliver strong after-fee returns to investors year after year, justifying the high fees required to pay them. The early years of Fidelity’s Magellan fund is the classic example.

The trick is finding that clever manager, which requires a combination of luck and the skill and inclination to compare numerous investment options. One thing making this task a little easier is the mutual fund industry practice of reporting returns, net of fees. But the research shows that stock funds that consistently outperform their benchmarks are few and far between – and finding them would be particularly challenging for 401(k) investors who already struggle with basic decisions.

Morningstar’s fee report indicates investors might be getting the message.  In 2015 and 2016, they pulled a total of $627 billion out of the group of actively managed funds charging the highest fees. During the same two years, they funneled $429 billion of new money into lower-fee index funds.

Yes, active funds’ average fee (called the expense ratio, in a prospectus) declined last year to 0.75 percent – or three-quarters of 1 percent – from 0.78 percent in 2015. This continued a downward trend: fees averaged 1 percent in the early 2000s.

But compare this with 0.17 percent for index funds. In contrast to actively managed funds, passive index funds aren’t set up to beat a market benchmark: their goal is to simply mimic the performance of a specific market index, whether it’s the Standard & Poor’s 500 or a Bloomberg Barclay’s bond index. …Learn More

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Top 10 Blogs Explore Weighty Issues

Millennials’ reliance on their parents, retirement finances, and long-term care – Squared Away readers had some serious topics on their minds during the first half of the year.

Here are the 10 most popular blogs, ranked by the number of page views each received between January and June:

  • Retiree Benefits: Tale of 2 Cities (and States)
  • Get Dental Work Before You Retire
  • Long-Term Care Insurance Goes Uptown
  • Long-Term Care on a Boxed Wine Budget
  • The Benefits of Late-Career Job Changes
  • Retirees Don’t Touch Home Equity
  • People Lack Emergency Funds, Tap 401(k)s
  • Managing Money with Cognitive Decline
  • Why Parents’ Home is the Millennial Crib
  • Our Stubborn State of Financial Illiteracy …

Learn More

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