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)
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after retirement when the money is withdrawn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.
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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
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Secure future
Pre-tax contributions
Interest on investment
Employer matching
Rollover of retirement
funds into IRA’s
• Access to funds for
legitimate purposes
Cons
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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
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:
Flat Rate:
Contributions
Years
Interest
5%
6%
7%
8%
9%
1-5
6-10
11-15
16-20
21-25
3.0%
4.0%
6.0%
7.0%
9.0%
5%
1-25
4.5%
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
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
Pros
• You will receive
professional management
• The risk will change
depending on how old you
are
Cons
• 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
Cons
•Allows additional income •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
Cons
•If the days don’t roll
over, you can still gain
something from
unused days
•You could have taken a
vacation or sick day
Risks Addressed
•Helps add money to the retirement fund