Your 401(k) Earns You Free Money!

Transcription

1 401(k) Guide

2 Your 401(k) Earns You Free Money! SURPRISED? WHEN YOU PARTICIPATE IN THE LARRY H. MILLER ASSOCIATES RETIREMENT PLAN, YOU CAN RECEIVE MATCHING COMPANY DOLLARS TO GROW YOUR 401(k). THIS IS A PRETTY BIG DEAL. ALL FULL-TIME EMPLOYEES (WORKING 30+ HOURS PER WEEK) OF THE LARRY H. MILLER GROUP OF COMPANIES ARE AUTOMATICALLY ENROLLED IN THE GROUP S 401(k) PLAN THE 1ST OF THE MONTH AFTER 60 DAYS OF FULL-TIME EMPLOYMENT AT A MINIMUM 1% CONTRIBUTION. YOU CAN SAVE FOR RETIREMENT, MAKE YOUR MONEY WORK FOR YOU, AND EVEN RECEIVE FREE MONEY FROM THE MILLER GROUP MATCHING A PERCENTAGE OF YOUR CONTRIBUTIONS! HERE S A BRIEF SUMMARY OF THE PROGRAM When you are initially eligible to participate in the Larry H. Miller 401(k) plan: 1. You will be automatically enrolled with a minimum 1% contribution from your paycheck on a pre-tax basis. Larry H. Miller will match your contribution with 50 cents on every dollar up to a 6% contribution on your part. You can always contribute more than 6%; however, the company match stops at 6%. 2. If you do nothing, your account will be set up and your money will be invested in the GoalManager Target-Date Fund Account. 3. If you choose not to participate in the Group s 401(k) plan, you can opt out prior to your eligibility effective date. 4. You can always increase your contribution to achieve your retirement goals. To take full advantage of the Larry H. Miller match, you will need to increase your contribution to 6%. 5. Changes in your contribution amount (your percentage) can be made monthly. 2 n 401(k) Guide

3 WHAT DOES THIS MEAN FOR MY PAYCHECK? Here s how automatic enrollment works: the first month after you pass that 60 day waiting period, 1% of every paycheck will automatically go into your 401(k) before taxes. You don t need to do anything in order for this to happen. If you wish to opt out, you can do so online any time before your effective date. However, we strongly encourage you to increase the amount of your contribution prior to your effective date. You can then make monthly changes to your contribution amount, allowing you to take full advantage of the Larry H. Miller matching contribution. WHY DOES LARRY H. MILLER OFFER A 401(k) PLAN? Most people find that when they retire they do not have enough money to live at the level to which they are accustomed. The Larry H. Miller Group of Companies is very concerned about making sure employees prepare for the future in a safe and secure manner. Automatic enrollment is designed to encourage awareness of the 401(k) program and to get you started, even at a very minimal level. I M YOUNG. WHY SHOULD I WORRY ABOUT SAVING NOW? Retirement is expensive. The beauty of a 401(k) plan is that the earlier you start saving, the more money you ll have upon retirement. To illustrate, consider the example of Jack, who started saving at age 20, and Jill, who started saving at age 45. Both made the same monthly contributions to an identical 401(k) plan. Jack only saved for 10 years, while Jill saved for 20 years. However, since Jack s money had a lot more time to grow, he had far more money than Jill did upon retirement. 401(k) Earnings Comparison Jack Starting EARLY $83.33/month Jill Starting LATER $83.33/month Age Started Saving Age Stopped Saving Total $ Contributed $10,000 $20,000 Total Years Contributed $248,378 Savings/Contributions Value at Age 65 $10,000 $20,000 $49,083 This hypothetical example is based on monthly contributions made at the beginning of the month to a tax-deferred retirement account and an 8% annual rate of return compounded monthly. Your own plan account may earn more or less than this example. When you think about saving money, NOW is always better than later. Later means more costs and less opportunity for growth, while now means tax savings and free money from the Larry H. Miller Group of Companies. 401(k) Guide n 3

4 WHAT IS A 401(k), AND HOW DOES IT WORK? To some, it may seem like a 401(k) is just a glorified bank or savings account. That is definitely not the case. Basically, a 401(k) is an employer-sponsored retirement plan where your money is invested into various mutual funds. And what are mutual funds? They are companies that pool money from various investors. They put the money into securities like stocks, bonds, and short-term debt. Investors (like you) own shares in mutual funds. The idea is for your money to make money. See page 6 for information on historical investment returns. The Larry H. Miller Group offers you the opportunity to participate in a Traditional (Pre-Tax) 401(k) Plan and/or a Roth (Post-Tax) 401(k) Plan. Traditional (Pre-Tax) 401(k): A Traditional 401(k) contribution is taken out of your paycheck BEFORE taxes. In other words, when you contribute to a Traditional 401(k), you don t pay taxes on it until you withdraw it down the road. This is an option for those who think they will be in a lower tax bracket when it comes time to withdraw funds. Roth (Post Tax) 401(k): Your other option is a Roth 401(k), which allows you to contribute AFTER taxes, meaning that when you withdraw your money upon retirement, you do not pay taxes on it. This is an option for those who worry that taxes will be much higher in the future than they are now. With a Roth, you can simply withdraw your money in the future and know exactly how much you have to spend. You may elect to participate in either the Traditional 401(k), a Roth 401(k), or both. Keep in mind, the employer match is always pretax and is only deposited into a Traditional 401(k) account. 401(k) Earnings Comparison Gross Pay (biweekly) $1,600 No Contribution Contributing 3% Contributing 6% to 401(k) to 401(k) Full Match EMPLOYEE CONTRIBUTION 401(k) Contribution $0 $48 $96 Taxable Pay $1,600 $1,552 $1,504 Federal + State Income Tax; FICA + Medicare (Assume 25%) $400 $388 $376 Take Home Pay $1,200 $1,164 $1128 EMPLOYER CONTRIBUTION LHM Match $0 $24 $48 My Retirement Account Savings $0 $72 $144 Total Cost Out of Pocket Over 40 Years $0 $37,440 $74,880 ($36.00 biweekly for 40 years) Estimated 401(k) Account Value in 40 Years $0 $547,848 $1,095,696 ($72 biweekly for 40 years, assume 8% return) These figures are estimates and are used to illustrate the actual difference in take home pay when contributing to your 401(k) account versus not contributing. Your actual taxes will depend on many factors which are not included in this analysis - number of children, charitable deductions, etc. For a more accurate estimate of these amounts, please consult a tax professional. Illustration uses an 8% annual rate of return compounded biweekly. 4 n 401(k) Guide

5 WHERE DOES THE FREE MONEY COME FROM? Because the Larry H. Miller Group of Companies cares about your future, the Group contributes matching dollars based on your contribution percentage up to 6%. This contribution match is 50 cents for every dollar you contribute, up to a maximum match of 6% of your income. For example, if you elect to contribute 6% of your income, the Miller Group match will contribute an additional 3%. That s free money to you! Since automatic enrollment sets the default contribution level to a minimum 1%, you will get an additional 1/2% for doing absolutely nothing. However, anyone who elects to contribute less than 6% of their income misses out on the maximum amount of free money Larry H. Miller can give you. The LHM Group will match your 401(k) contributions 50 cents for every dollar you save up to 6% of your pay Annual Salary LHM s Annual 3-Year Total 5-Year Total Match 6% Match Match $20,000 $600 $1,800 $3,000 $30,000 $900 $2,700 $4,500 $40,000 $1,200 $3,600 $6,000 $50,000 $1,500 $4,500 $7,500 Match is subject to 5-year vesting schedule below and assumes Full-Time employment with a 6% contribution. VESTING Vesting refers to how much of the money in your 401(k) account is actually yours. You are always 100% vested in your contributions (including rollover contributions), plus the earnings on those contributions. Where vesting makes a difference is with the money contributed by the Miller Group (the salary match). The Larry H. Miller Group of Companies contribution is vested as follows: Target Vesting Date GoalManager Model Years of Service 1 Year 2 Years 3 Years 4 Years 5 Years Percent Vested 20% 40% 60% 80% 100% 401(k) Guide n 5

6 SO, HOW MUCH MONEY WILL I NEED FOR RETIREMENT? The trick is to carefully evaluate your goals and needs, and then plan conservatively in order to cover for the unexpected. Ideally, it helps to take full advantage of the LHM matching contribution. However, it may also make sense to contribute a bit more, especially if you are closer to retirement. Also, try looking at things with a retirement perspective. There are several factors to keep in mind. Retirement Age: The norm for retirement is now 66. However, for some people, 70 is a perfectly reasonable retirement age and allows for more time to save money. When you retire is up to you, but what is important is planning for the years after that. Life expectancies are rising, and it s not uncommon for people to live years after they retire. Retirement Income: Thanks to Social Security, most of us can expect a certain amount of income after retirement. However, experts predict that Social Security may only provide roughly 20% of needed income during retirement. Inflation: Prices go up all the time. Think about how much more expensive things have gotten in the last decade and how much they will cost 30 years in the future. Recently, inflation has generally been less than 3% per year. Unless your current savings plan provides an interest rate higher than that, your money won t grow enough. For example, with a 3% inflation rate, something that costs $100 now will cost $250 in 30 years. A cash pool that seems large now may not seem so large in the future. The following chart illustrates how a good investment plan can outpace inflation. Compound Annual Return $100k $26,641 $10k $4,677 $1k $100 $109 $21 $10 $13 $ Small Stocks 12.3% Large Stocks 10.1% Government Bonds 5.5% Treasury Bills 3.5% Inflation 3.0% 6 n 401(k) Guide Hypothetical value of $1 invested at the beginning of Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results.

7 Costs: It is tempting to think that costs will be much lower upon retirement. After all, commuting won t be an issue, it s possible to have your house paid off at that time, and you ll just be taking it easy, right? What you may not realize is that you may still have house or car payments, and you may want to spend your money on entertainment and vacations. Some retired people need to help take financial burdens from their children or to help pay for a grandchild s college education. Retired people still pay taxes, which can remove a significant portion of your income. These costs can drastically reduce a retirement fund without careful planning. Two Different Approaches to Project Retirement Income Annual Salary: $60,000 Projected Total x Retirement Savings: $600,000 to $900,000 Some industry experts recommend total retirement savings of times annual salary. Or Total Retirement Savings: $1,463,415 Annual Withdrawal Rate: x 4.1% Annual Expenses: $60,000 Others recommend that you save enough to allow for 4.1% withdrawals each year in retirement that will pay for your annual expenses for approximately thirty years of retirement. HOW MUCH DO I NEED FOR RETIREMENT? Get on track with your financial future using The Retirement Income Estimate tool on The Merrill Lynch benefits online website. Use the tool on the My Accounts page to determine: Your estimated retirement income goal How much retirement income you may be able to achieve Whether you surpass or fall short of your goal and by how much WHEN CAN I WITHDRAW MY MONEY? You can begin to receive distributions at the age of 59 ½ regardless of when you retire. If you do receive a distribution any time before age 59 ½, you are subject to a 10% additional tax penalty. However, you must start to receive yearly benefit distributions no later than April 1st of the first year after you reach 70 ½ years of age. 401(k) Guide n 7

8 CAN I EVER GET ANY MONEY BEFORE I RETIRE? There are several exceptions to withdrawal rules that generally appear when you are suffering undue hardship and need a temporary increase in your available funds. For the most part, this will take the form of a loan, where you borrow against your Plan account balance. Loans You can borrow 50% of your vested balance. When you do borrow against your 401(k) account, you are required to pay a loan application fee of $50. You are also required to pay back this loan through payroll deduction. You can choose to pay it back over a period lasting anywhere from 1 to 5 years. Hardship Withdrawals If you have already taken out a loan and still need to withdraw money from your 401(k), you are eligible for a hardship distribution. If you get a hardship distribution, you do not pay back the money, but you are subject to 10% Federal withholding taxes and an additional 10% penalty. At the same time, you are not allowed to withdraw any of the employer match funds. In addition, you are not allowed to contribute to the 401(k) program for six months. Application for a hardship withdrawal requires you to complete a hardship application. If you are married, your spouse also needs to sign and date the application. Your spouse s signature will need to be notarized. It is also important to provide evidence that you truly need a hardship withdrawal. This would come in the form of documentation such as notices from a mortgage company or medical bills. Hardship withdrawals are available for those who: Need help purchasing a primary residence Need help preventing eviction from a primary residence Need help paying post-high school tuition for themselves or an immediate family member Need help paying for medical expenses that are not covered by insurance and exceed government guidelines Need help paying for funeral expenses for an immediate family member 8 n 401(k) Guide

9 HOW DO I MANAGE MY 401(k)? Once you are automatically enrolled in the program, your personal account is set to several defaults. First, your contribution is set at the minimum 1%. Second, your funds are enrolled in a GoalManager Target-Date Fund Account. This is a plan designed to make it easy for people to plan for retirement. It takes into consideration your age and adjusts investments accordingly in order to reduce risk as you get older. You don t have to do anything to take advantage of this plan. Target Date GoalManager Model Target-Date: GoalManager Models Retirement Model Cash 20% 15% 10% 5% 5% 0% 0% 0% 0% Bonds 60% 55% 35% 30% 20% 20% 15% 10% 5% Stocks 20% 30% 55% 65% 75% 80% 85% 90% 95% You do, however, have the option to change the investment direction of your plan. One other option is the GoalManager Risk-Based Plan. This plan allows you to choose a risk level and then leave your account until you wish to change the level again. Higher risk investments can potentially earn more money, but there is a greater chance of loss as well. Risk-Based: GoalManager Models Conservative Conservative Moderate Moderate Aggressive to Moderate to Aggressive Cash 15% 10% 5% 5% 0% Bonds 55% 35% 30% 20% 5% Stocks 30% 55% 65% 75% 95% A third investment direction option is for you to choose your mutual funds yourself. This is an ideal option for those who study the markets and want a very hands-on approach. It is important to remember that you can change your plan at any time. WHO GETS MY MONEY IF SOMETHING HAPPENS TO ME? In the event of your death, your 401(k) account will transfer to your beneficiary. If you are married, your spouse is automatically your beneficiary. To name someone else, you must complete a separate form and have your spouse s consent. The form can be downloaded at If you are single and haven t chosen a beneficiary yet, you can name a beneficiary when you sign in to your online account. If you don t name someone as your beneficiary, your estate will go to probate to determine who will receive your 401(k) account upon your death. 401(k) Guide n 9

10 HOW DO I GET STARTED? Getting started is easy. If you are comfortable with the default 401(k) options, simply do nothing. If you want to explore your options a bit or change your contribution amount, you have that option. To Enroll, Opt Out, or Make Changes Making changes to your automatic enrollment is easy: 1. Create an Online Account by visiting benefits.ml.com. 2. From the Home Page, click on Enroll in Your Plan or Enroll Now. (See below) 3. Confirm the auto enrollment parameters, elect your own, or opt out. To view your investment holdings: 1. Click the 401(k) Plan tab at the top of the screen. To calculate take-home pay with a new contribution rate: 1. Click on 401(k) Plan > Current Elections. 2. Enter your salary and payroll frequency. 3. Move the slider to estimate how different contribution rates may affect your take-home pay. To change your contribution rate: 1. Click on 401(k) Plan > Current Elections 2. Select the Contribution Rates drop down, then Change Contribution Rates. 3. Move the slider left or right (or fill in the box) after entering your personal data to estimate the effect on take-home pay. 4. Click Continue and follow the easy steps to confirm your change. To change how your future contributions will be invested: 1. Click 401(k) Plan > Current Elections. 2. Select the Investment Direction drop down. 3. Click Change Investments. To view account statements: 1. Click 401(k) Plan > Account Information 2. Select the Statements drop down. Regardless of how many changes you want to make, it helps to take a look at your personal account in order to make a more informed decision. Here are the recommended steps for making sure that your retirement years are everything they should be. 1. Monitor Your Online Account 2. Explore Your Investment Options 3. Start Saving 4. Reach Your Retirement Goals! The options are here. It s just up to you to take advantage of them. The future is yours! 10 n 401(k) Guide

11 Note: This publication is only a partial summary of benefits and is provided for information purposes only. It does not describe all elements of the summarized programs. For complete information regarding the benefits, plan provisions, limitations and exclusions, and for a description of grievance procedures and binding arbitration of disputes, refer to the subscriber certificate that will be provided to you after enrollment. In the event of a discrepancy or conflict between the information contained in this publication and the benefit plan provisions, the plan documents and insurance contracts will govern. Copies of these documents are available for your review from your Human Resources Department. No rights shall accrue to you and/or your dependents because of any statement, error or omission in this publication. Contact Information 401(k) PLAN Merrill Lynch Participant Service Center benefits.ml.com To reach an advisor: (k) Guide n 11

12 lhm.com/benefits