As plan sponsors work with their employees to ensure they are doing everything possible to have a comfortable retirement, they may be overlooking an opportunity outside of the retirement program. Most Americans (83%) are failing to maximize their retirement savings by not contributing to an IRA, according to the TIAA-CREF 2014 IRA Survey.1 As a plan sponsor, you can help employees boost their annual retirement savings—and improve their retirement readiness—by educating employees about the potential benefits of IRAs. These include their role in relation to your own retirement program and the fact that they can potentially cut their 2013 taxes if they contribute by April 15, 2014.
Saving beyond the workplace retirement program
More than one-third (35%) of those not contributing to an IRA said they would not consider one because they already have a workplace retirement plan. Still, saving solely in a workplace plan may not be enough: The average American household faces a potential retirement shortfall of approximately $20,000 per year.2
Contributing to an IRA allows qualified employees to save an additional $5,500 ($6,500 for those 50 and over) per year beyond their workplace plan contributions. It can also help them with tax diversification in retirement: Because qualified distributions from a Roth IRA made in retirement are tax-free, unlike funds from a workplace retirement plan, investing in a Roth offers diversification in retirement planning tax strategies.
Many workers are overwhelmed by the different savings and investment vehicles available to them when creating a retirement income plan. You can help them navigate these challenges by collaborating with your providers to offer education, guidance and advice to ensure that these different retirement savings accounts are working together.
Educating employees about IRAs
Americans share many misconceptions about IRAs:
In total, 39% of survey respondents do not understand what an IRA is, and an even larger percent (68%) are not aware of the maximum amount they can contribute each year. (Learn more about age and income limitations on IRA contributions and deductions.)
Providing education about IRA benefits and features can help workers to understand how they can maximize their total annual retirement savings. Education could especially benefit the 29% of workers who would not consider an IRA as part of their retirement strategy because they don’t know enough about IRAs.
Leaving money on the table
An important part of IRA education for employees should be a discussion of how IRA contributions should work in tandem with contributions to their 401(k) or 403(b). Ideally, employees should contribute the maximum to both their workplace plan and their IRA, but that is not possible for everyone. In deciding how to make trade-offs, employees should be certain to at least meet their employer match before diverting savings to an IRA. At present, only 27% of Americans contributing to both a workplace plan and an IRA make their IRA contributions after getting their full employer match, and just 9% max out their workplace plan contributions before making IRA contributions. You can help employees make the most of their savings options without leaving the “free money” of an employer match on the table.
Easier planning with fewer accounts
Although several pieces of legislation over the past decade have made it easier to roll over retirement savings from different employers into a single account such as an IRA, a number of employees have not taken advantage of this option: 21% of Americans have one or more retirement accounts left over from previous jobs, which they have left in their former employer’s plan. Of these respondents, more than half (54%) said they had not rolled over their funds because they didn’t have time or didn’t know what to do with them.
People have different options when it comes to managing old retirement accounts. In some cases, there may be advantages to leaving funds in a previous employer’s plan instead of consolidating in an IRA, such as lower investment fees or certain investment options. However, employees should also consider that sometimes there are advantages to rolling over funds into an IRA, such as easier retirement planning and more effective asset allocation.
Making it simple for employees
It’s clear that many people are daunted by the prospect of understanding retirement savings vehicles outside of their workplace plan. According to the survey, only 15% of Americans spent two hours or more planning for an IRA investment in the past year. More people spent that much time planning to buy a tablet (16%) or a flat-screen TV (21%), or selecting a restaurant for a special occasion (25%). By offering access to IRAs as part of a comprehensive retirement plan and providing education about their benefits, you can help employees improve the chances of meeting their retirement goals.
Prior to rolling over a retirement account from a former employer, participants should carefully consider their other options. They may also be able to leave money in their current plan, roll over money to an IRA, or cash out all or part of the account value. They should weigh each option carefully and its advantages and disadvantages, including desired investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and their unique financial needs and retirement plan. They should seek the guidance of your financial professional and tax advisor.
Please note investing involves risk. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.