IBM 401(k) Plus Plan A Review of Investing for Your Financial Future Prepared by Vanguard for IBM January 2017 Print or download the newsletter How to become a better investor Here s a surprise: Over the last 30 years, the typical U.S. stock investor earned an average of just 3.7% annually while the Standard & Poor s 500 Index returned an average of over 10% annually.* How can you outpace the average investor and increase your chance of financial success? Here are four strategies to consider: 1. Save more. 2. Keep expenses low. 3. Be balanced and stay the course. 4. Have a long-term investment plan. 1. Save more. For many investors, saving more is the surest way to reach long-term financial goals. Your savings rate, after all, is one of the most important factors under your complete control. Choosing to be a strong saver could make a big difference in when you can retire, as this hypothetical example shows: Bob and Jane each want to retire after they ve added another $500,000 to savings. Both earn $80,000 a year. Bob decides to save 10% of his pay (his own payroll contribution plus his company match), while Jane elects to save 15%. Assuming they each earn a 7% average annual return, how much sooner do you think Jane would retire than Bob? A) One year B) Two years C) Three years D) Four years Jane could retire after 21 years of saving, Bob after 25. So, the answer is D. Four extra years at the start of retirement could add a lot of sunny days to Jane s life.
2. Keep expenses low Investment returns may be uncertain, but investment costs are much less so. Because costs subtract from returns, keeping costs low will tend to increase your investment returns. The costs associated with investing in the IBM 401(k) Plus Plan s funds are among the lowest available anywhere. For example, the weighted average expense ratio of the investments in the plan are nearly one-fourth the mutual fund industry s average. Plan weighted average fund annual expense ratio* 0.17% ($17 a year per $10,000 invested) Mutual fund industry weighted average annual expense ratio* 0.64% ($63 a year per $10,000 invested) An expense ratio is the cost of running an investment expressed as a percentage of its assets. Expense ratios are important because, quite simply, costs are subtracted from your investment returns. A lower expense ratio means you get to keep more of what you earn. You can find the most up-to-date expense ratio information for the funds in the IBM 401(k) Plus Plan by reviewing the Fund Flyers. They provide information on each fund, such as the fund s objectives, risks, performance, and expense ratio. 3. Be balanced and stay the course. Determining an appropriate asset allocation the mix of stocks and bonds, such as, say, 60% stocks and 40% bonds is the first step to building a diversified portfolio. Not sure what an appropriate mix is for you? Consider investing in a Target Retirement Fund. Target Retirement Funds are professionally managed, broadly diversified, self-adjusting, low-cost funds that can serve you throughout your career and into retirement. Before you invest in a Target Retirement Fund, be sure to read the Fund Flyers for more detailed information about each fund. Once you have a diversified portfolio, stick to your investment strategy. Yes, there will be bumps along the way. The market dropped significantly during the Great Recession of 2007-2009, but it has also nearly tripled in value after touching bottom in March 2009. Selling out of the market during gloomy times can mean missing a powerful rebound, which is when long-term investors realize their greatest gains. *Figures according to the 2016 Dalbar Quantitative Analysis of Investor Behavior.
4. Have a long-term investment plan. He who fails to plan is planning to fail. --Winston Chruchill Having a well thought-out investment plan can help you weather the market storms (when it s most tempting to change direction). A good plan is focused on achieving your goals (a comfortable retirement, for example) rather than timing the market. Your Plan offers several planning services that can help you create and stick to your investment plan. Whether you want professionals to manage your account for you or you just want a little guidance, the IBM 401(k) Plus Plan offers services that can help. Learn more about the services available to you.
Get help creating your financial plan The IBM 401(k) Plus Plan offers different planning services with every type of investor in mind from do-it-for-me to do-it-myself investors, as well as those in the middle who want some assistance. Do it for me Help me do it Do it myself Target Retirement Funds Online Advice Online tools Managed Accounts IBM MoneySmart Plan education materials Active IBMers: Earn a 2017 wellness incentive by completing an Online Advice investment assessment or arranging a session with an IBM MoneySmart coach. For more information on the incentives, log onto CaféWell at https://www.cafewell.com/. Do it for me You can turn over the management of your investments to professionals with these two options: Target Retirement Funds and Managed Accounts. Target Retirement Funds require a minimum amount of your time and effort to manage. In fact, you only need to choose one of these funds to build a complete portfolio. Just consider the Target Retirement Fund that most closely aligns with the approximate year you expect to retire or start withdrawing your retirement savings. These funds are designed to provide you with a professionally managed, low cost, self-adjusting investment mix that can serve you throughout your career and into retirement. Before you invest, be sure to read the individual Fund Flyers for more detailed information about each fund.
Managed Accounts puts Financial Engines in charge of your IBM 401(k) Plus Plan portfolio. With Managed Accounts, Financial Engines will, for a fee*: Create a personalized Retirement Plan for your IBM 401(k) Plus Plan account. You can also personalize the advice you receive by making adjustments to your desired retirement age or your risk profile. Select your funds and make transactions on your behalf. Keep you on track and appropriately allocated and diversified over time, adjusting your investment mix as you approach retirement. *The fee for Managed Accounts is 0.30% per year for the first $375,000 in assets and 0.20% per year for assets over $375,000. The fee is deducted directly from your 401(k) account each quarter, per the Terms and Conditions. For more information about Managed Accounts or to get started, log on to financialengines.com/foribm. Help me do it You can obtain expert guidance on how to manage your investments from these two services: Online Advice from Financial Engines and MoneySmart Coaches. Online Advice from Financial Engines will enable you to complete a personalized assessment to help you evaluate whether your IBM 401(k) Plus Plan investments are aligned with your age, personal goals, and other financial assets. This service may be right for you if you enjoy managing your 401(k) Plus Plan account. With no additional cost to you, Online Advice can: Use powerful online tools to enable you to build your strategy, project your retirement income, and explore ways to improve your retirement outlook. Receive independent, personalized investment recommendations for your IBM 401(k) Plus Plan account. Online Advice can also help you evaluate changes before you make them. Log in anytime to see if you are on track; note that you are responsible for requesting transactions for your account, including rebalancing. For more information about Managed Accounts or to get started, log on to financialengines.com/foribm. IBM MoneySmart provides IBMers access to MoneySmart Coaches who are available for confidential, one-on-one financial planning sessions. MoneySmart is offered at no cost to active IBMers in the U.S. Coaches are available to discuss topics such as investment planning, saving for retirement, IBM benefit plans, plus generalized financial planning and wellness. Your session can be brief or result in several follow-up sessions at your request.
You have two options: Call Ayco at 877-543-7678 for broad-based financial counseling (Monday through Friday, 9 a.m. to 8 p.m., Eastern time) or register on the MoneySmart portal. Call Fidelity at 800-976-1054 for retirement planning (Monday through Friday, 8 a.m. to 8 p.m., Eastern time). Do it myself Do-it-yourselfers can build a well-balanced portfolio from your Plan s many investment offerings. You can use IBM tools and educational materials, such as Fund Flyers, to help you construct and maintain your investment plan. Before investing in any investment option of the IBM 401(k) Plus Plan, please carefully consider its investment objectives, risks, charges, and expenses. For this and other important information, or to obtain a free copy of the Fund Flyers for the All-in-One Life Cycle/Core Building Block/Expanded Choice Institutional funds or a mutual fund prospectus or, if available, a summary prospectus, call the IBM Employee Services Center at 800-796-9876. Service Center representatives are available Monday through Friday (excluding New York Stock Exchange holidays) from 8:30 a.m. to 8:30 p.m., Eastern time. Read and consider all fund flyer and prospectus information carefully before you invest. Advisory services, including Managed Accounts and Online Advice, are provided through Financial Engines Advisors L.L.C. or its affiliates, a federally registered investment advisor and wholly owned subsidiary of Financial Engines, Inc. Future results are not guaranteed by Financial Engines or any other party. Financial Engines is not affiliated with Fidelity Investments or its affiliates. Financial Engines does not sponsor or issue, or serve as an investment manager to, any target date funds. You should decide whether Target Retirement Funds are right for you. See Fund Flyers for details.
What s so great about Roth? It s been said that two things in life are certain death and taxes. There may not be a way to avoid the former, but the IBM 401(k) Plus Plan has an option that could help you avoid certain taxes in retirement when you might need the break the most. If your tax rate is lower today than in retirement, it may be advantageous to pay taxes now instead of later. What s the secret? Having Roth money in your Plan. With traditional before-tax contributions, you would owe ordinary income tax on the money you withdraw after age 59½. Withdrawals made prior to age 59½ may be subject to a 10% federal penalty tax. Roth is different you pay taxes on the contributions and withdrawals of Roth dollars are tax-free, provided that you meet two conditions: You must be at least age 59½, and it must be at least five years since your first Roth contribution or conversion. This tax-free difference is helpful with retirement planning, because 100% of your Roth account balance will be yours to spend in retirement. Should you make Roth contributions? If you anticipate that your income tax rate will be higher in the future, you d be giving yourself a tax break by making Roth contributions today. You d be paying at a lower tax rate today than you would have to pay on withdrawals later. Of course, it s hard to be certain what your tax rate might be in retirement. So you may want to consider pursuing a strategy of tax diversification holding both before-tax and Roth funds in your Plan. Whatever you decide, it would be wise to discuss your options with a tax professional before taking action. The two conditions for tax-free Roth withdrawals You must be at least age 59½. It must be at least five years since your first Roth contribution or conversion.
Two ways to add Roth to your Plan 1. Make Roth contributions. You can simply switch some or all of your ongoing Plan contributions from before-tax to Roth 401(k). Roth contributions to the Plan are made with after-tax money, so expect to see your take-home pay drop a bit if you add Roth contributions. Annual Plan contributions are subject to IRS limits $18,000 if you are under age 50 or $24,000 if you will be age 50 or older in 2017. 2. Make a Roth in-plan conversion. You may have already accumulated a significant amount of before-tax money and/or after-tax earnings in the 401(k) Plan. An in-plan conversion allows you to convert your money in the 401(k) Plan to Roth. You can choose to convert all or a portion of your Plan balance to Roth, but be aware that there can be important tax considerations. How Roth in-plan conversions work When you convert before-tax money or after-tax earnings to Roth, you pay the income tax you would have owed on the converted money as if you had withdrawn it that year. However, you don t pay the 10% federal penalty tax on early withdrawals if you are under the age of 59½. Once the money has been converted to Roth, it stays in the Plan and any earnings that accumulate grow tax-free. When you retire, you can withdraw the money tax-free as long as you meet the two conditions. If you don t meet them, you ll owe regular income tax, and potentially a 10% federal penalty, on any earnings you withdraw. Withdrawals of Roth contributions are not taxed or penalized. Is Roth right for you? The Roth assessment tool on tab 2 of this lesson might help you decide. Find out what Roth can do for you. Get started with Roth today Call the Employee Service Center at 800-796-9876 for more details.
Advice to newer investors A new employee has a lot to learn at the beginning. Perhaps that s why some new IBMers hesitate before enrolling in the 401(k) Plan, and tend to save a bit less than average once they ve joined. If you re new to the Plan, here are just three boxes to check to get off to a strong start: Join the IBM 401(k) Plus Plan as soon as you re eligible. Don t wait. It can be a costly mistake. Take the case of George and Elaine, a hypothetical pair of employees hired on the same day. Elaine joins the Plan as soon as she is eligible and saves 8%, or $200 per pay period. Her co-worker, George saves an identical amount but joins the Plan a decade later. Each earns an identical 6% average annual return on their Plan savings. $1,000,000 $800,000 $804,762 $600,000 $400,000 $411,102 $200,000 0 25 30 35 40 45 50 55 60 65 Elaine George This example is for illustrative purposes only and does not imply the returns that may be available on any particular investment. Elaine s final balance represents 40 years of saving 8%, or $200 a pay period, with a 6% annual return. George s final balance represents 30 years of saving 8%, or $200 a pay period, with a 6% average annual return.
When they both retire coincidentally the same day Elaine has almost twice as much money as George. Those first years of savings might not seem important, especially because account balances start small. But Elaine s account compounded for an extra 10 years, nearly doubling its value. Save enough to catch the entire match. About 20% of IBM Plan participants don t capture the entire matching contribution offered to them. Saving enough to receive 100% of the match is like earning a risk-free return on your contributions. The markets rarely offer such generous opportunities to accumulate wealth. Raise your savings automatically. Saving enough to capture the full match is probably not enough to provide for a comfortable retirement. For example, Vanguard suggests that participants save at least 12% to 15% of their income annually, including any matching contributions. Workers who earn more than $127,200 annually might want to save even more because Social Security benefits replace a lower percentage of their income in retirement. If this sounds like a stretch, take it in steps by enrolling in the Automatic Increase Program under the Contribution tab on netbenefits.com/ibm. Selecting this option will automatically increase your contribution rate each year, during a month that you specify. Small automatic increases can be your path to higher savings.
How to turn savings into retirement income During your career, you probably focused on building your retirement savings. As retirement nears, a new goal appears: How do you convert your savings into income that can last for decades? While not an exact science, there are guidelines to follow when converting savings to income. They re designed to reduce (but not wholly eliminate) the chance you run out of savings before your retirement ends. The 4% rule of thumb For more than 20 years, financial advisors have suggested that retirees use a 4% rule of thumb when spending their savings. Provided you re invested in a diversified mix of stocks and bonds, the rule says you can withdraw 4% of your retirement savings in the first year of retirement. In subsequent years, that withdrawal amount is increased with the rate of inflation. Following this approach offers a good chance but not a certainty that a retiree s assets could last for 20 or 30 years. A new approach based on assets The 4% spending rule is popular and relatively easy to follow. But it doesn t account for changes in the value of a retiree s investment portfolio. That s why the idea of using a dynamic spending rule has gained acceptance. Dynamic spending means adjusting your withdrawals to the value of your retirement portfolio. (Many retirees already do this intuitively, tightening their belt if the market drops, or spending a bit more after a few good years for the market.) Under the dynamic spending approach, an investor starts out again with a flat withdrawal of up to 4% of their account balance in the first year. But if their account value falls in year two, they might reduce their withdrawals, say by 2.5%. Or, if their account value rises, they might raise their withdrawal by 5% over the previous year. Let s use a hypothetical investor named Jim as an example. In the first year he withdraws 4% of his $400,000 portfolio, or $16,000. But then in year two, if the market dropped, he would withdraw 2.5% less, $15,600 ($16,000 2.5%). What if instead of dropping the market rose in the second year? Jim would increase his withdrawal to $16,800 ($16,000 + 5%). In flat years, when there wasn t much change in the value of his account, Jim would continue to withdraw 4% of his current account balance.
Jim adjusts his yearly withdrawals for investment performance Year one Adjustment Year two Portfolio value rises $16,000 + 5% = $16,800 $400,000 x 4% = $16,000 Portfolio value stable Withdraw 4% of portfolio value Portfolio value falls $16,000 2.5% = $15,600 The more retirees are able to reduce spending when the markets are performing poorly, the lower their chances of running out of money, or of having to cut spending dramatically late in retirement.* For more guaranteed income consider an annuity When thinking about how you ll pay your bills in retirement, guaranteed income such as Social Security or a pension can be of great value. Many financial planners suggest that retirees have enough guaranteed income to cover their basic fixed expenses, such as rent or mortgage, property taxes, and utilities. If you want more guaranteed retirement income, consider purchasing an annuity. When you retire, you have the option to convert all or part of your 401(k) account to an annuity. This would provide a steady monthly income that you can t outlive. Two basic types of annuities Immediate annuities begin to pay income immediately or within 12 months from the date of purchase. In exchange for a one-time, lump-sum payment, an insurance company guarantees monthly payments for as long as you live. Deferred income annuities pay income beginning at a future date that you select, which can be as early as 13 months or as late as your 85th birthday. The longer you wait, the higher the amount of income you will receive once the payout age is attained. If you elect a death benefit, in the event you pass away before the income payments begin, there would be a return of premium to a beneficiary. If you elect not to have a death benefit and you pass away before the income payments begin, there would not be a return of premium or any payments made to beneficiaries. A valuable tool for comparing annuities Shopping for an annuity can be confusing, and costs can vary greatly. As a participant in the IBM 401(k) Plus Plan, you have access to the Hueler Income Solutions tool. The tool will provide free quotes from multiple providers. You can easily compare annuity payments, features, and fees. To learn more, visit the Hueler Income Solutions website Income Solutions Or you can speak with a Hueler annuities specialist at 866-297-9835. *From assets to income: A goals-based approach to retirement spending, Vanguard Research, September 2016.
Through the IBM 401(k) Plus Plan, you can use the Hueler Income Solutions tool to request free annuity quotes with only the features you need, and receive responses from several insurance companies at once. If you have questions concerning annuities or need help using the Income Solutions tool, talk with a Hueler annuities specialist at 866-297-9835. The underlying risks, financial obligations, and support functions associated with the products are the responsibility of the issuing insurance company. The issuing insurance company is responsible for its own financial condition and contractual obligations. Actual quotes from insurance companies will be based upon each individual s quote information, current market conditions, and the sponsoring organization at the time a quote is requested. Income Solutions is a registered trademark of Hueler Investment Services, Inc., and used under license. United States Patent No. 7,653,560.
Plan contribution maximums for 2017 The maximum contribution, based on IRS restrictions, to the IBM 401(k) Plus Plan is $18,000 in 2017 for those under age 50. If you will be age 50 or older in 2017, you are entitled to save up to $6,000 more in catch-up contributions, or a maximum of $24,000. Want to save all that you can? Use the Deferral Maximizer at NetBenefits.com/ibm to automatically save the maximum amount you are eligible for. If you will turn age 50 in 2017, make sure to change your deferral option to Deferral Maximizer Plus Catch-Up.
How can we help? Website 24/7 netbenefits.com/ibm NetBenefits App 24/7 Voice response system 24/7 800-796-9876 (U.S.) Service Center Representatives M-F, 8:30 a.m. to 8:30 p.m., ET 800-796-9876 (Translators available) 800-426-6537 (TTY) 2017 International Business Machines Corporation. Participation in the Plan is offered only by means of the Prospectus. The intent of this newsletter is to provide useful investment information, not investment, tax or legal advice. Each participant is ultimately responsible for making his or her own investment decisions. All advisory services, including Managed Accounts and Online Advice, are provided by Financial Engines Advisors L.L.C., a federally registered investment advisor and wholly owned subsidiary of Financial Engines, Inc. Future results are not guaranteed by Financial Engines or any other party. Financial Engines is not affiliated with Fidelity Investments or its affiliates. The Ayco Company L.P. is a subsidiary of the Goldman Sachs Group, Inc., and an affiliate of Goldman, Sachs & Co., a worldwide, full-service investment banking, broker-dealer and asset management organization. Financial Engines is a trademark of Financial Engines, Inc. All rights reserved. Used with permission. Apple and the Apple logo are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android and Google Play are trademarks of Google Inc. IBM and the IBM logo are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Vanguard accepts no responsibility for information on third-party websites.