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To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.
In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerances for risk.
It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.
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President Bush signed the Pension Protection Act (PPA) into law on August 17, 2006. Ostensibly, the bill is a reaction to the current consolidation of Defined Benefit Pension plans, but there are a significant number of changes which impact Defined Contribution Plans, too: 401(k), 403(b), and 401(a) plans. You may have read about some of the most prominent changes already, especially the Automatic Enrollment provisions.
At PensionTrend, we’re waiting for guidance from the Department of Labor, and even some technical corrections from Congress before we feel comfortable relying on the new legislation. We were researching and preparing for the new options, though, even before the Act was signed into law.
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Automatic Enrollment is the feature of the PPA that’s attracted the most attention. It’s an idea that many plans have already initiated, as long as a decade ago. Also know as “negative election,” it’s a process by which new enrollees begin deferring into the plan, by default, even without filling out an enrollment form. The PPA gives the idea more credibility and clears up some gray areas.
Depending on the demographics and design of your plan, we think Automatic Enrollment is a great idea. It works best in low turnover industries (manufacturing and financial services as opposed to retail & restaurants), and larger companies and may provide some help passing your discrimination tests if your plan needs it. Automatic Enrollment is a positive feature: it’s been proven that most participants who start to defer won’t stop.
However, this is one of the components of the Pension Protection Act which requires some additional description. Today we are waiting for the government to provide guidance about the mechanics of automatic enrollment:
· Where should automatic contributions be invested?
· What should the notice to participants look like?
Some explanation has already been provided. It’s a near certainty, for example, that the default investment for automatic contributions won’t be a money market or stable value fund. Most likely it will be some kind of lifecycle or balanced fund, but until we get a definitive answer we think it’s prudent to wait for guidance before adopting automatic contributions in your plan.
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EGTRRA Permanency gets the least coverage, but it is the most important component of the PPA. The catch up contributions you’ve been using for your over age 50 employees to contribute more than the annual limit, the higher compensation limits we’ve been using in your compliance tests, the 100% of compensation limit for deferrals were all set to expire in 2010. With the PPA, these limits won’t be reduced back to their pre-EGTRRA limits. Roth contributions, initially set to expire in 2010, are also here to stay.
- Some Vesting Schedule terms need to be scaled back from their current 7 year term, or in some cases 5 year term (in the case of a “cliff” schedule-0% for the first 4 years, 100% on the 5th). With the introduction of the PPA, these schedules need to be amended back to a 6 year term (or 3, in the case of a cliff schedule). Most of our clients’ matches and profit sharing dollars are contributed to ‘safe harbor’ sources-they’re already on a 6 or 3 year term vesting schedule. Vesting schedules on other Profit Sharing or Match sources, however, will need to be amended.
There is certainly more to the Pension Protection Act which may affect the way we work with your retirement plans. The PPA may require changes to our blackout notices, the timing of our distributions, even the distribution of the Summary Annual Report to participants. The legislation even promotes a new retirement product in 2010: the DBk!
Rest assured that we’ll stay on top of the latest developments. In October, in fact, we sent a delegation from PensionTrend to Washington, DC to learn more about the ramifications of the PPA & how you can use it to best advantage. Stay tuned!
The above statements are expressed as a general description and should not be construed to contain specific tax or legal advice. The reader should consult their attorney or accountant for advice specific to their circumstances.
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IRS and Social Security Cost-of-Living Adjustments for 2003 – 2008
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IRS Limits |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
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DC Plan Annual Additions Limit |
$46,000 |
$45,000 |
$44,000 |
$42,000 |
$41,000 |
$40,000 |
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DB Plan Limit on Annual Benefits |
$185,000 |
$180,000 |
$175,000 |
$170,000 |
$165,000 |
$160,000 |
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Section 401(a)(17) Compensation Limit |
$230,000 |
$225,000 |
$220,000 |
$210,000 |
$205,000 |
$200,000 |
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401(k), SARSEP, & 403(b) Plan Deferrals/Catch-up |
$15,500/ $5,000 |
$15,500/ $5,000 |
$15,000/ $5,000 |
$14,000/ $4,000 |
$13,000/
$3,000 |
$12,000/
$2,000 |
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457 Plan Deferrals/Catch-up |
$15,500/ $5,000 |
$15,500/ $5,000 |
$15,000/ $5,000 |
$14,000/ $4,000 |
$13,000/
$3,000 |
$12,000/
$2,000 |
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SIMPLE Deferrals/Catch-up |
$10,500/ $2,500 |
$10,500/ $2,500 |
$10,000/ $2,500 |
$10,000/ $2,000 |
$9,000/
$1,500 |
$8,000/
$1,000 |
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IRA Contribution/Catch-up |
$5,000/ $1,000 |
$4,000/ $1,000 |
$4,000/ $1000 |
$4,000/ $500 |
$3,000/
$500 |
$3,000/
$500 |
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Highly Compensated Employee Compensation |
$105,000 |
$100,000 |
$100,000 |
$95,000 |
$90,000 |
$90,000 |
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Compensation Defining Key Employee (Officer) |
$150,000 |
$145,000 |
$140,000 |
$135,000 |
$130,000 |
$130,000 |
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SEP Annual Compensation Triggering a Contribution |
$500 |
$500 |
$450 |
$450 |
$450 |
$450 |
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Social Security Wage Base |
2008 |
2007 |
2006 |
2005 |
2004 |
2003 |
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Social Security Taxable Wage Base (SSTWB) |
$102,000 |
$97,500 |
$94,200 |
$90,000 |
$87,900 |
$87,000 |
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July 31, 2006 According to the Investment Company Institute’s survey of the mutual fund industry, stock mutual funds posted an $8.40 billion outflow in June, compared to a $3.16 billion inflow in May of this year. The last month that stock funds experienced an outflow was in February of 2003. Bond funds had an outflow of $345 million in June, following an outflow of $2.55 billion in May. Money market funds had an inflow of $20.06 billion in June, after a $50.83 billion inflow in May.
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Keeley Small Cap Value fund completed a 2 for 1 stock split for all shareholders of record on Monday, July 10, 2006. This means that the share price has been cut in half and all shareholders will receive an additional share of the fund for each they own as of July 10, 2006. Additional shares will be posted to all shareholders when they are received by the custodian, expected by the end of this week.
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June 29, 2006 The Federal Reserve announced this afternoon that it will increase short-term rates by an additional .25% for the 17th consecutive meeting in a row. Many economists now expect at least one and possibly two further increases, perhaps as soon as the next scheduled Fed meeting on August 8th. Today’s increase was apparently anticipated by investors, as all equity indexes finished the day up sharply.
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