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Pension Managers, Companies Push Saving Plans

High fuel prices. The mortgage crisis. Rising unemployment. These are all factors causing Americans to not save as much as they should for retirement. But financial services insiders believe that a general lack of financial literacy, the failure of companies to educate employees about retirement planning and a belief that the government will rescue them from destitution in old age are the main reasons Americans aren’t aggressively saving for their retirement years. “I think that people in general underestimate just how much money they really do need to save for retirement,” said Shannah Compton, a financial advisor and a partner of SLC Insurance Services Inc. in Woodland Hills. “I think it will be a huge toll on state, local and federal resources (if people don’t save).” Compton, who specializes in financial literacy for the under-40 crowd, believes that younger generations will be particularly disadvantaged if they don’t save because advances in medicine will likely result in them living longer, thereby lengthening the amount of time they spend in retirement. There’s also the possibility that Social Security will not be available for younger people. “The Baby Boomers who are entering into retirement now are heavily taxing the system,” Compton said. Even if Social Security and Medicare are available to younger people, “They might get them at a later age or get narrower benefits,” said Shirley Svorny, chair of the Economics Department at California State University, Northridge. “It’s not sustainable in terms of being able to provide the same type of care for everybody who might demand it in the future.” But planning for retirement isn’t just important to stave off destitution in old age, there are clear financial advantages to investing in products such as a 401(k), experts say. People think, “I’d rather have all of my money,” Compton said. “They don’t understand the true value of the 401(k), which is called dollar cost averaging. You’re in mutual funds. You’re doing them low. You’re doing them high. You’re doing them in between. Overall, the cost to participate is really modest.” Svorny believes that young people might be more inclined to invest in a 401(k) if they calculated how much compound interest the investment would generate throughout their working years. “If you put in $100 every month and, say, you’re 25, how much compound interest over time that will make is really a large amount,” she said. “If people looked at that, they might be inclined to start saving earlier.” There is also a tax benefit to having a 401(k). That’s because one doesn’t pay taxes on the investment until funds are withdrawn. Another advantage arises if an employee’s company is willing to match the contributions the employee makes to the plan. “That’s free money. There’s an automatic return there,” said Tom Ellis, an investment specialist at Carmichael Associates, a full service financial and insurance services firm in Westlake Village. Companies can take a number of additional steps to encourage employees to consider investing in a 401(k). For one, Compton said, they need to enlist the services of financial services experts who can educate the staff about the benefits of retirement planning. “Companies leave the 401(k) information in the hands of the HR department,” Compton said. “HR people are not financial professionals. They don’t have the background to educate people. Young people don’t understand the importance of taking care of our finances. We need a visual example of the power of the 401K. It doesn’t sink in for us.” Ellis believes that, if companies had enrollment meetings at least semi-annually, more employees would be inclined to opt into a 401(k) plan. Patricia Campbell, director of corporate benefits for Health Net, said that the Woodland Hills company has managed to increase enrollment in its 401(k) plan by six to seven percent in recent years by actively encouraging employees to participate. “We have a very comprehensive communications strategy to try to promote the plan,” she said. “Each year, we target new hires as they come into the community via mail.” They also use telephone marketing and target longer-term employees that haven’t yet enrolled, promoting Health Net’s “very generous” corporate matching program. “We show them how much money they might need for their retirement and how much money they could be missing out on by delaying their participation in the plan,” said Campbell. Health Net also provides a portfolio of investment options based on an employee’s age and anticipated date of retirement. “They could choose just one of those, and they’ll still be diversified,” Campbell said. But Health Net makes the greatest impact when it has onsite 401(k) meetings, Campbell continued. The meetings are not only designed for new hires and hires who have yet to enroll but for current enrollees who need a refresher course of sorts on the benefits of a 401(k). For companies that don’t have as comprehensive an outreach plan as Health Net, Ellis believes the Pension Protection Act of 2006 will help them increase the amount of employees who engage in retirement planning. The PPA, implemented last spring, allows companies to make opting in to a 401(k) the default. In other words, in the past, employees had to choose to join the pension plan. Now, they have to actively opt-out if that is their desire. “That in itself is going to help more people participate,” Ellis said. Hiring qualified money mangers to oversee pension plans is a crucial component of trust-building which in turn helps persuade people to invest in their retirement, according to Alex Soteras, a former trustee for the Los Angeles County Employees Pension Fund for the County Board of Supervisors. “We go through a rigorous process with our staff of analyzing every money manager and rating them and managing the different assets of the County employees’ pension funds,” Soteras said. “There’s literally billions of dollars in private and public pension funds that have to be managed. It’s important to choose top money managers to manage those funds.” But Soteras also feels that people need to take more initiative in planning for their retirement. “I think the employees need to learn more about who is managing their retirement funds. They need to understand the kind of pension plan they’re paying into and get some advice from their money manager or CPA about how their money is being invested and the kind of return that they’d achieve.” Cash-strapped employees also need to know all of the facts about withdrawing funds from pension plans. For example, after withdrawing from a 401(k), one would not only have to pay regular income taxes but also a 10 percent fee assessed by the federal government and a 2 & #733; percent assessed by the State of California. “Withdrawing funds form the 401(k) prior to retirement is typically never a good idea unless there are true economic hardships,” Ellis said. As for borrowing from a 401K, not all companies allow that. But, if a company does allow for loans to be taken out against a 401K, borrowers should be sure they can pay the money back, Ellis said.

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