New Ways to Save An Overview of Recent Developments in Retirement Funds Team 2: Reginald Annoh-Ashley, Emily Carlson, Qian Gao, Chang Yeon Kim, John Mihalitsas, Zach Richardson, Andrew Spurling, Josh Zakas

Automatic Enrollment in 401(k)

A retirement investment plan offered by a corporation that allows employees to invest part of their income without paying income tax until after retirement when the money is withdrawn after retirement 401(k) allows employees to reduce and shift the burden that is coming from retirement Employees are automatically enrolled in a 401(k) plan unless they choose to opt out

401(k) Risks 401(k) is economically sensitive. ▫Inflation risk ▫Risk of concentrated stock ▫Longevity risk ▫Overly aggressive allocations ▫High record-keeping costs ▫Diversification choices ▫Eligibility requirements ▫Early cashing out

Automatic Enrollment in 401(k) Pros Cons Secure future Pre-tax contributions Interest on investment Employer matching Rollover of retirement funds into IRA’s Access to funds for legitimate purposes High inflation rates Taxable withdrawals High management fees Restricted investment choices Mandatory withdrawals begin at age 70 and half 10 percent penalty on early withdrawals

Step-Up Contributions

Employers are either automatically enrolled or have the option to enroll in a step-up contribution. The employer contributes a larger percentage of their earnings into the fund each year. ▫Usually a raise of 1% per year of their paycheck ▫Stops growing after it reaches 6-10%. Each year their interest rates improve or step-up to a higher level, and more money is accrued, rather than having a flat interest rate.

Step-Up Contribution Risks If the economy boosts, then you could be stuck with a lower interest rate The rate will not change unless you change employers Financial Stress: more money is removed each year from your paycheck Difficulties of extra retirement savings If you retrieve your money early, you are penalized tax fees The company could go under Unexpected unemployment

Step-Up Contribution Example Tim wants to retire in 25 years from his job with Deloitte Consulting. Jim starts with $60,000, and every 5 years on the job earns him a $10,000 pay raise. If he puts his money in a step-up option rather than a flat rate option for retirement, see what the differences are in his total benefit?

Step-Up Contributions Example, cont. Step-up: ContributionsYears Interest 5% % 6% % 7% % 8% % 9% % Flat Rate: 5% %

Step-Up Contributions Example, cont. Step-up: Total Benefit = 154,540 (25 years) Flat Rate: Total Benefit = 104,500 (25 years) Even though you have to put more of each paycheck in your retirement fund every 5 years, you are gaining nearly 50% more profit in using the step-up contribution option rather than the flat rate option

Life-Cycle Funds

A highly diversified mutual fund designed to remain appropriate for investors in terms of risk throughout a variety of life circumstances Accordingly, life-cycle funds offer different risk profiles that investors can shift invested funds between in order to manage risk effectively as they move from youth to middle age to retirement Although life-cycle funds all share the common goal of first growing and then later preserving principal, they can contain any mix of stocks, bonds, and cash

Two Types of Life-Cycle Funds Target Date: o Operates under an asset allocation formula that assumes you will retire in a certain year o Adjusts its asset allocation model as it gets closer to that year o The target year is identified in the name of the fund Target Risk: o Three groups (based on risk tolerance) from which to choose:  Conservative  Moderate  Aggressive o If you decide later that your risk tolerance has changed as you get closer to retirement, you have the option of switching to a different risk-level

Life-Cycle Fund Risks Investor Education Asset Allocation Inflation Crash

Life-Cycle Fund Pros and Cons ProsCons You will receive professional management The risk will change depending on how old you are You are essentially putting all of your eggs in one basket You will have to pay extra money for management You will not have much control over where your money goes

Employee Stock Ownership Plan

Employee Stock Ownership Plan (ESOP) The company creates a trust fund where they invest profits The company then uses the trust fund to purchase their own stocks Then the company distributes stocks to employees either equally or based on pay Upon employee’s departure, the company buys back the employee’s stock and the money can be used for retirement

Risks Addressed by ESOP Inflation ▫Grows with the market Disability/unemployment/career change ▫Receipt of funds is not age-based ▫Employee still owns stocks Death ▫Transferable to family Change in social security policies ▫ESOP is immune to these changes

ESOP Pros and Cons Pros Cons Corporate contributions are tax deductible Employees are also afforded stock options to purchase (puts/calls) Can be combined with additional retirement plans (401(k)s, IRAs, etc.) Increases incentive among employees for their company to do well No diversification because all the stock is in one company Change in government policies can have a negative effect

Phased Retirement When an employee nears retirement age, they have the option to scale down hours or work part-time for their employer after retirement Pros Allows additional income Cons Not fully retired: the employee still has to work Risks it addresses Not having enough money to retire completely for various reasons such as –Stock Market Crash –Divorce

Unused Vacation/Sick Days Employees have the option to cash in unused sick and vacation days to help fund their retirement Pros If the days don’t roll over, you can still gain something from unused days Cons You could have taken a vacation or sick day Risks Addressed Helps add money to the retirement fund