THINGS EVERY EMPLOYEE OF DELOITTE NEEDS TO KNOW

Transcription

1 THINGS EVERY EMPLOYEE OF DELOITTE NEEDS TO KNOW

2 CONTENTS DELOITTE S 401(K) HAS BOTH GOOD AND BAD INVESTMENT OPTIONS... 1 What Makes a 401(k) Good or Bad?... 1 Using Deloitte s 401(k) to Invest... 1 Which Vanguard Funds Do I Pick?... 1 DELOITTE S PENSION PLAN WON T COVER ALL YOUR RETIREMENT NEEDS... 3 Deloitte s Pension Plan... 3 What is a Cash Balance Pension Plan?... 3 How Much Money Will Get You Out of Your Cash Balance Pension Plan?... 4 And Now for the Good News... 4 YOU NEED MORE THAN DELOITTE S FREE DISABILITY INSURANCE... 5 What is Disability Insurance?... 5 Deloitte s Disability Insurance Policy in Action... 5 Short-Term Disability... 5 How do I Sign Up for Deloitte s Short-Term Disability?... 6 Long-Term Disability... 6 Don t Opt for Deloitte s Additional Long-Term Disability Coverage... 6 What s Wrong with Deloitte s Long-Term Disability Insurance?... 6 Filling the Gap Left by Deloitte s Disability Insurance... 7 ABOUT THE AUTHOR: JON LUSKIN... 8 DISCLAIMER... 9

3 DELOITTE S 401(K) HAS BOTH GOOD AND BAD INVESTMENT OPTIONS 401(k)s are employer-provided investment accounts designed to meet your financial needs in retirement. These accounts receive special tax treatment and creditor protection. It works like this: You put money in the account now and take money out once you have retired. When you put money into a traditional 401(k) account, you get a tax break. Invested money grows without being taxed as long as the money stays in the account. When money comes out of the account, you get a tax bill. (Penalties exist if you use funds in the account before retirement.) Therefore, one advantage of using a 401(k) to invest is that your money grows without being taxed annually since annual taxation decreases your investment return. What Makes a 401(k) Good or Bad? Taxes aren t the only thing that impact your investment return. Another factor is investment fees. Investment managers charge you to invest your money for you. The less money you pay the money managers, the more money you can keep for yourself. Therefore, better investments cost less, and the not-so-great investments cost more for the simple reason that paying a high fee means less money for you. You can measure a manager s fee by looking at a fund s expense ratio (ER). The ER is usually expressed as a percentage, such as 1.00%. The lower the ER, the more money you keep as an investor. Using Deloitte s 401(k) to Invest Fortunately, Deloitte s 401(k) is offered through the investment company Vanguard. And Vanguard has some very low-cost investments. That s good news for you, the investor. Unfortunately, Deloitte s 401(k) lists some high-cost products on their investment menu too. Picking the low-cost funds off of the investment menu those with the name Vanguard means paying less money to investment managers. Avoiding the higher cost funds such as those with the names T. Rowe Price and Dreyfus can mean keeping more money in your account. Which Vanguard Funds Do I Pick? If you re not a giant investing nerd like yours truly, Deloitte s 401(k) has a very simple solution for you: the Vanguard Target Date Fund. 1

4 A target retirement date fund is different from most other investment funds. Most funds are usually made up of just one type of investment like United States bonds, or European stocks. A target date fund is a single fund composed of many different types of investments. Moreover, the investments in a target date retirement fund change over time: buying less stocks (relatively risky), and buying more bonds (relatively safer than stocks) as you move closer to retirement. This change in investment holdings happens automatically without any additional work from you, the investor. The fund also rebalances automatically selling those investments that have increased relative to those that have decreased. This automatic rebalancing keeps your investments on point without any effort on your end. By using a target date fund, you get full diversification, automatic rebalancing, and your investments are synced to your timeline for retirement. It s pretty much the best thing to happen to the retail investor. Target date funds are usually available in five year increments; target date 2015, target date 2020, target date 2025, etc. If you do opt for a target date fund, consider the particular target date fund that is closest to the particular year you plan to retire. 2

5 DELOITTE S PENSION PLAN WON T COVER ALL YOUR RETIREMENT NEEDS The pension offered at Deloitte is not like the pension your parents had access to. Deloitte s pension is relatively small, and will probably not cover any significant part of your living expenses in retirement. Deloitte s Pension Plan To get super technical, Deloitte offers what is called a defined benefit pension plan. More importantly, the defined benefit pension uses a cash balance formula. This means that instead of expecting a guaranteed payment in retirement (like your parents may have received), you can expect a contribution by Deloitte into your investment account. This is similar to the contribution that Deloitte makes to your 401(k) account. You ll notice that a few of the words in the last sentence are in quotes. This is because technically your account is hypothetical. (You do not have a real account somewhere, but simply a promise from Deloitte to pay you in the future.) But that s not as important as knowing what sort of money you can expect from your cash balance pension plan. What is a Cash Balance Pension Plan? As mentioned, a cash balance pension plan has a lot of parallels with your 401(k) account. Like your 401(k) account, the value of a defined contribution pension plan (or a cash balance plan) is only as valuable as the amount of the contributions and the growth of the account. Company Plan Type Payment Determined By EY Defined Benefit Pension Plan Salary & Years of Service Deloitte Defined Benefit Pension Plan - Cash Balance Contributions & Account Growth - 401(k) Contributions & Investment Return To the detriment of your lifestyle in retirement, the hypothetical money in a cash balance plan will likely never grow as fast as the investments in your 401(k) plan. With a 401(k), you can get access to stock market returns. On long timelines, this can average 10% a year! Compare this 10% to the money in the cash balance plan, which only grew at roughly three percent (3%). 3

6 How Much Money Will Get You Out of Your Cash Balance Pension Plan? To give you an idea of what sort of numbers you can expect from Deloitte s cash balance plan, let s turn to our favorite fictional Deloitte employee, Joe Danger, CPA: Having worked at Deloitte just long enough, Joe is now able to participate in Deloitte s pension plan. Joe gets $1,500 put into his cash balance pension plan. The next year, he gets a little bit more, with the original $1,500 earning a bit of interest over the last year. After 30 years, Joe is sitting on over $150,000 in his cash balance pension plan. Ready to enter retirement, Joe has a choice in front of him, annuitize the amount or take it as a lump-sum. The lump-sum option means Joe is entitled to $150,000. Annuitization will get Joe an annual payment of $10,000 a year for the rest of his life. Looking at the anecdote above, it s easy to note that Joe (i.e. you) will likely need other income than the $10,000 annually that you can expect from Deloitte s pension plan. Deloitte employees take note: pension plans are not what they once were. You cannot expect to fund the total of your living expenses from your pension plan alone. You will need to supplement your income in retirement with your 401(k) plan, your outside IRA, and your taxable investment accounts. And Now for the Good News The good news is multifold: firstly, you can count on Deloitte employer s pension plan to help you save for retirement if only just a little bit. Secondly, you now know not to count on your Deloitte s pension plan to completely cover you in retirement. This gives you the opportunity to plan your savings for retirement with plenty of time to spare. 4

7 YOU NEED MORE THAN DELOITTE S FREE DISABILITY INSURANCE As part of their benefits package, Deloitte offers some disability insurance. Unfortunately, group (i.e. employer-provided) disability policies are far from perfect leaving you severely exposed in the event of disability. Deloitte s disability policies are no exception. What is Disability Insurance? Disability insurance is also known to as income-replacement insurance because that s what it does. Disability insurance replaces (a portion of) your income in the event that you are no longer able to work. Disabled means that you can no longer perform your job, which usually means you are no longer earning income. Deloitte s Disability Insurance Policy in Action To get an idea of what a disability policy may look like, let s turn to a story starring our favorite fictional Deloitte employee: Joe Danger, CPA. Joe Danger, CPA earns $100,000 a year working at Deloitte. In his free time, Joe juggles chainsaws. During a recent performance at the Del Mar Fair, Joe loses both his hands. Without any digits, Joe is no longer able to use the number pad on his keyboard. Deloitte s long-term disability policy pays Joe $40,000 a year, for two years. That s a pretty big pay-cut moving from $100,000 in one year to just $40,000. But, we ll get to that later. First, know that Deloitte provides you with not one but two disability insurance policies, both through MetLife: short-term disability (STD) long-term disability (LTD) Short-Term Disability Short-term policies are distinct from long-term policies in not only how long they last, but when you start receiving benefits. (The waiting period between becoming disabled and receiving benefits is a called a deductible. ) Deloitte s short-term disability benefits can kick in just one week after an accident or injury. How long the benefits last depends on your station at Deloitte. Managers receive up to 25 weeks, with nonmanagers receiving as little as 12 weeks of short-term benefit payments. 5

8 At first glance, you may focus on the difference in manager versus non-manager benefits. Don t get hung up on that. Short-term benefits are just: short. Financial planning should be focused on the longterm benefits because these are the benefits that will make or break your financial plan. How do I Sign Up for Deloitte s Short-Term Disability? Deloitte s short-term disability is offered for free as an employer benefit. You pay nothing for it and are signed up automatically. So, though the coverage for non-managers is not as nice as the coverage for managers, the price is still right: free! Long-Term Disability Deloitte s long-term disability policy kicks in 180 days after disability. So, if you re not a manager, this will result in a lapse of disability coverage. The lapse occurs the 12 weeks after the short term ends and 180 days before the long-term disability begins. Fortunately, this gap in coverage is no big deal for anyone with an emergency fund: up to six months of living expenses saved in cash. So, by following one of the basic financial planning rules of thumb (i.e. save up to six months of mandatory living expenses in cash), you re automatically protected from this gap in coverage! Don t Opt for Deloitte s Additional Long-Term Disability Coverage Like Deloitte s short-term disability policy, Deloitte offers some long-term disability coverage for free. The company provides up to 40% of your base salary. Via Metlife, Deloitte offers you the opportunity to purchase additional long-term disability coverage, bumping your coverage up to 60% or 66.7% of your base salary. But, you should pass on it. And this isn t it because disability insurance is not a worthwhile investment but because the policy offered by Deloitte has a big hole in it: an own occupation definition of just two years. What s Wrong with Deloitte s Long-Term Disability Insurance? To explain own occupation, let s return to our hypothetical story with Joe Danger, CPA: Joe is no longer able to perform his function as an accountant at Deloitte. Fortunately, he is enrolled Deloitte s base long-term disability policy. His benefits kicks in after 180 days, paying Joe 40% of his base wages. Joe collects $40,000 a year, for two years. Two years later, the disability policy stops paying benefits. Why is this the case? Why do Joe s benefits end after two years? For the disability policy offered by Deloitte, the conditions for receiving benefits change at the two year mark: Before two years disability means: you cannot perform YOUR OWN job (i.e. accountant) 6

9 After two years disability means: you cannot perform any job given your education and experience So, two years later Joe still cannot perform his job as an accountant. BUT, Joe could find work as a lecturer on corporate finance at the local community college. On that basis, (i.e. you do not need hands to do the job of a college lecturer), the disability insurance policy will stop paying out benefits after two years. For Joe, or anyone holding just the basic disability policy provided for free by Deloitte, this is a big problem. Filling the Gap Left by Deloitte s Disability Insurance A little financial planning provides a solution to the gaps left by Deloitte s disability insurance policy. PROBLEM #1: The short-term disability insurance policy (or the absence of any short-term policy) can leave gaps in coverage of more than three months. SOLUTION: Create an emergency fund with six months of living expenses. Put this money in cash in a savings account. PROBLEM #2: Deloitte s long-term disability policy may provide a base amount of coverage (such as 40%) and changes the meaning of disability after two years of benefits. SOLUTION: Purchase a private long-term disability with the following features: An own occupation definition that does not change A cost-of-living adjustment A partial disability provision Benefit coverage to age 65 You can shop for a disability insurance policy at Policy Genius. Be sure to purchase a long-term disability policy from a well-rated insurance company. You can look up credit ratings at AM Best. 7

10 ABOUT THE AUTHOR: JON LUSKIN Being married to an employee of Deloitte, I ve had the fortune of sifting through Deloitte s benefit offerings. This means picking out the health insurance policy that makes the most sense for us reading the fine print in Deloitte s long-term disability insurance policy screening out the high-fee funds from the low-cost funds offered in Deloitte s 401(k) and doing the calculations to determine if Deloitte s employer-provided life insurance is sufficient to cover our needs Since I ve already done the work, I can share what I ve learned here. Hopefully, this can help you if you are an employee of the Big Four. If you have a question that s not already answered, shoot me an at jon@definefinancial.com. If you re interested in working with me, feel free to schedule an introductory meeting. There s no cost or commitment here. The intro meeting is simply a chance for us: to meet each other to figure out if we can work together well to see if I can help you To schedule an appointment, us at info@definefinancial.com, call our office at , or schedule an appointment instantly online. 8

11 DISCLAIMER Any views or opinions presented in this article are solely those of the author and do not necessarily represent those of anyone. The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell any investments ever under any circumstances, most especially those investments mentioned, or to solicit transactions or clients. Past performance of the investments discussed will most likely not continue and the investments will likely not achieve the returns as implied. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for their specific situation. 9