In this our third in a series of articles about helping clients in the Accumulation Phase of Retirement Planning, we address the inefficient use of retirement savings vehicles. Selecting the appropriate use of accumulation vehicles for their unique situation can be an overwhelmingly daunting task to the client. There are a wide range of options available, as well as a significant number of issues to consider when determining optimal use of retirement planning vehicles.
Motivating the Client to Address This Issue
Again, carefully crafted questions will create awareness and a sense of urgency about resolving the issue:
- “How has your advisor assisted you in selecting optimal retirement savings vehicles?”
- “How did your advisor help you determine that these retirement savings vehicles maximize your ability to save on a tax-deferred basis?
- “How has your advisor assisted you in maximizing the leverage of your retirement portfolio contributions?”
Selecting Optimal Retirement Savings Vehicles
There is a vast array of retirement savings vehicles that are either employer-sponsored plans or can be established by individuals. These vehicles have a wide variety of features. While no one has access to all the vehicles, most people have access to more than one.
By using a checklist when determining which types of plans to utilize for each situation encountered, a financial professional can review each vehicle and by deductive selection arrive at the best choice(s) per given set of circumstances. The following is a suggested checklist for this purpose.
RETIREMENT PLAN SELECTION CHECKLIST
Check all available plans. The client may be eligible for plans that they are not aware of.
Contributory or Non-Contributory?
If the employer pays all or a good portion of the cost, you can’t beat the price. By all means, participate.
How much do I get to take with me if I leave? If a client is planning on a change in employment in the near future, counting on employer contributions that will not vest could be a faulty selection.
What is the quality of investment options and flexibility in selecting among them? Who makes investment decisions, me or the employer? Do options allow for overall retirement assets to be properly diversified? The plan itself may not offer preferred diversification, but may offer option(s) which work well with the overall retirement portfolio.
How secure are my plan assets?
Is the plan qualified or nonqualified? Is it covered by the Pension Benefit Guarantee Corporation? How secure are the investment options? “Security” can range from “risky” employer stock to U.S. Treasury securities.
Type of Plan?
Defined Contribution or Defined Benefit? How are contributions determined? Defined Benefit plans can be very attractive at older ages.
EMPLOYER-SPONSORED and PERSONAL ACCUMULATION PLANS
Accessibility to Plan Funds?
Some clients will want to access funds for education, emergencies, etc.
Death or Disability
What are the plan provisions in the event a participant dies or becomes disabled?
Income and Estate Taxation
What are the income tax consequences of contributions, accrued earnings, withdrawals, and distribution to heirs?
Contributions Pre-Tax or After-Tax?
It is easier to budget larger contributions if contributions are pre-tax. If after-tax without other plan benefits, it may be a good idea to compare this option to a growth-oriented investment outside of the plan where a net after-tax return could be more favorable and the stepped-up basis could be used at death.
Can I save as much as I need/want to save? Maximums vary by plan type and possibly by the actual plan itself.
Objectives Regarding Desire to Pass Assets to Heirs?
For example, Roth IRAs have no RMD requirements and personal assets will probably realize a stepped-up basis.
For those who wish to learn more about critical issues in retirement planning, check out Greene Consulting’s Retirement Planning Program.