The oldest of the boomer generation are now reaching that traditional mid-60 retirement age. The recent stock market woes have decimated retirement plan nest eggs. What should boomers be doing with their 401(k) plan accounts as they enter the home stretch?
Some plans offer extremely competitive fixed account or stable value options that would be prudent for boomers within a few years of their desired retirement age. For example, if your client is holding a 50 percent cash and 50 percent S&P 500 allocation, assuming 1 percent on cash and 8 percent for the S&P 500, they earn a blended return of 4.5 percent for the year. By transferring the cash to the fixed account, assuming a 4 percent rate, the blended return increases 33 percent to 6 percent without allocating additional funds to the equity markets. If the client's plan does not offer a strong fixed option, ask the administrator if there is a self-directed brokerage account option.
This option, while less common, would allow access to a much wider universe of investment options. Although there would be additional transaction fees involved, there may be a compelling reason to move funds to the self-directed area of the plan. Always recommend a deferral rate that will maximize any company match contributions and don't overlook catch-up contributions as well.
Retirement plan participants age 59 1/2 and older typically have the ability to process an in-service withdrawal. The specific plan account rules will apply in this area. An in-service withdrawal allows for a rollover to an IRA while still an active participant in the plan. You must verify with the administrator that taking a withdrawal does not preclude the client from continuing to participate in the plan. IRAs offer more control in terms of investment options and beneficiary designations. My previous columns have also detailed the importance of creating a lifetime stream of income for boomers who do not have the luxury of a defined benefit pension plan payment. Retirement plan assets rolled to IRAs should focus on income guarantee programs that are unavailable within 401(k)s. Coordination of 401(k) plan assets with outside IRA and taxable assets is essential to sound planning.
Whenever we talk to clients about withdrawals from employer-sponsored retirement plans we are mindful of the opportunity for Net Unrealized Appreciation treatment on company stock within the plan. This little-known section of the tax code allows the client to withdraw company stock from their retirement plan and pay taxes on the cost basis, not the current value. Shares that are subsequently sold enjoy capital gain treatment as opposed to ordinary income. As tax rates appear to be headed up again, this could be invaluable to boomers ready to retire now.
Younger boomers with additional time to rebuild their nest eggs, who have not yet returned to the equity markets, would be well served to get reinvested; but gradually via a dollar cost average approach. Be diligent with target-date funds, as many boomers will default to this option. The recent market swoon took a bite out of target-date fund values as well. If your clients are now behind in their savings, continued participation in a target-date fund and its glide path toward a more and more conservative allocation may not get them to their goal. Additionally, some target-date funds have a finish line that corresponds to the start of retirement and the allocation remains static thereafter. This can present problems for retirees with predominantly bond oriented accounts, especially in a low-rate environment as we have today.
Mark A. Cortazzo, CFP is senior partner with MACRO Consulting Group in Parsippany, N.J.