Mar
25
2022
Tips for Investing in Retirement

5 Investment Tips for Retirees

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 5 Investment Tips for Retirees

A lot of personal finance advice is about saving for retirement. But the need for saving and investing doesn’t stop once you’re done working; seniors also need to maintain a sound investment strategy during retirement.

Retirees face several challenges that make investing after 65 necessary, including maintaining safe income streams, outpacing inflation, and avoiding the risk of running out of money. Here are some tips seniors may consider as they choose the right investment path during retirement.

5 Tips for Investing After Retirement

1. Assess Income Sources and Budget

Once in retirement, seniors likely don’t have an income stream from a steady paycheck. Instead, retirees utilize a mix of sources to pay the bills, such as Social Security, withdrawals from retirement and savings accounts, and perhaps passive sources of income such as rental properties. This change, going from relying on a regular salary to relying on savings and investments to fund a particular lifestyle, can be daunting.

Retirees should first understand where their income is coming from and how much is coming in to help navigate this financial change. This initial step can help establish a budget that allows the retirees to comfortably cover expenses and map out discretionary spending or new investments in their golden years.

Recommended: Typical Retirement Expenses to Prepare For

2. Understand Time Horizon and Risk

Retirees must consider time horizon and risk in post-retirement investment plans. Time horizon is the amount of time an individual has to invest before reaching a financial goal or needing the investment earnings for living expenses.

Time horizon significantly affects risk tolerance, which is the balance an individual is willing to strike between risk and reward. Generally speaking, seniors with a time horizon of a decade or more may invest in riskier assets, such as stocks, because they have time to ride out any short-term downturns in the market. Individuals with a short time horizon of just a few years may stick to more conservative investments, such as bonds, where they can benefit from capital preservation and interest income.

3. Consider Diversification

Diversification involves spreading out investment across different asset classes, such as stocks, bonds, real estate, and cash. Diversification also involves spreading investments out among factors such as sector, size, and geography within each asset class.

It is important to consider diversification when investing after retirement. Diversification helps investors protect their portfolios from the risk and volatility unique to a specific type of investment. Retirees do not want to concentrate a portfolio with any one asset, which may increase volatility during a period when they want a low risk tolerance.

Recommended: Why Portfolio Diversification Matters

4. Rebalance Regularly

A retiree’s financial goals, risk tolerance, and time horizon generally affect the desired asset allocation in an investment portfolio. However, those initial goals and risk considerations can change during a retiree’s golden years. Additionally, the market is constantly in flux, shifting the proportions of assets a person holds. It may make sense to rebalance the assets inside a portfolio regularly.

Rebalancing a portfolio can be thought of like the routine upkeep of your investments. For example, if a portfolio has an asset allocation of 70% bonds and 30% stocks and the stocks do well during a year, they might make up a higher percentage of a portfolio than planned. By the end of the year, the asset allocation may be 65% bonds and 35% stocks. The investor may want to rebalance by selling stock and buying more conservative assets, such as bonds, to ensure the portfolio’s asset allocation is in line with their goals. Alternatively, they may use other income to make new bond investments.

Recommended: How Often Should You Rebalance Your Portfolio?

5. Keep an Eye on Inflation

Retirees living on a fixed income may be negatively affected by rising inflation. As prices increase, the fixed income that an individual relies on will be worth less the following year. For example, if an individual receives $1,000 a month in a fixed income and inflation rises by a 4% annual rate, then that $1,000 monthly income will be worth $960 in today’s money.

Investments that pay out a fixed interest rate, such as bonds, are most vulnerable to inflation risk as inflation may outpace the earned interest rate.

Investors can help protect themselves against inflation risk by owning assets that tend to outpace inflation, such as stocks, real estate, or inflation-protected securities.

Recommended: How Does Inflation Affect Retirement?

Smart, Safer Investment Options for Retirees

Retirees have a lot of choices when it comes to making new investments. But, their financial goals, age, and risk tolerance can impact which investments they choose to make. Here are a few investments for seniors in retirement with those factors in mind.

Cash

Cash is the most stable way to hold money, and it is a necessary part of a retiree’s financial portfolio. Keeping cash on hand can help cover necessities like housing, utilities, food, and clothes.

Retirees can put a portion of their cash in a money market account or a high-yield savings account to earn interest while having easy access to their cash. However, the interest paid out in typical savings or checking accounts tends to be very low and may not beat the inflation rate. That means the money in these accounts may slowly lose its value over time.

Bonds

Bonds generally don’t offer the same potential for high returns as stocks and other assets, but they have advantages for investing after retirement. Bonds typically pay interest regularly, such as twice a year, which provides investors with a predictable income desired in retirement. Also, if investors hold a bond to maturity, they get back their entire principal, which can help preserve their savings while investing.

Various types of bonds help investors preserve capital and realize interest income during retirement, including relatively safe U.S. Treasuries. Additionally, Treasury-Inflation Protected Securities (TIPS) are bonds that hedge against inflation, which can be helpful for retirees worried about rising prices.

Stocks

Stocks are considered a risky investment; they tend to be more volatile than more conservative assets like bonds or certificates of deposit. Though investing in stocks can lead to significant returns, it also means there is the potential for big losses that many retirees may not be able to stomach. However, retirees shouldn’t write off investing in stocks because there is a potential for losses. There is value in investing in stocks for seniors.

Stock investments may help ensure a portfolio experiences capital gains that outpace inflation and have enough income in the later decades of their retirement. It may not make sense for older investors to chase returns from higher risk stocks like tech start-ups. Instead, retirees may look for proven companies whose stocks offer steady growth. Retirees may consider investing in companies that provide stable dividend payouts that generate a regular income source.

Recommended: Living off Dividend Income: Here’s What You Need to Know

Certificates of Deposit

Certificates of deposit, otherwise known as CDs, are low-risk investments that may offer higher interest rates than typical savings accounts. Investors put their money in a CD and choose a term, or length of time, that the bank will hold their money. The term length is generally anywhere from one month to 20 years, and during this period, the investor can’t touch the money until the term is up. Once the term is over, the investor gets the principal back, plus interest. Typically, the longer the investor’s money is in the account, the more interest the bank will pay.

Annuities

Annuities can provide retirees with a regular income, bolster the gains from other investments, and supplement savings. In short, an annuity is a contract with an insurance company. The buyer pays into the annuity for a certain number of years, and the insurance company pays back the money in monthly payments. Essentially, an individual is paying the insurance company to take on the risk of outliving their retirement savings.

The Takeaway

Investing for retirement should begin as soon as possible, ideally through a tax-advantaged retirement account. But the need for a sound investing strategy doesn’t stop once you hit retirement. You need to ensure that your savings and investments are working for you throughout your golden years.

Another step that can help you manage your retirement savings is doing a 401(k) rollover, where you move funds from an old account to a rollover IRA.

SoFi makes the rollover process seamless and simple — which helps to avoid any kind of penalty. There are no rollover fees or taxes, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar
03
2022
How Does Inflation Affect Retirement?

How Does Inflation Affect Retirement?

By | invest, Investing, Preparing for Retirement | Comments Off on How Does Inflation Affect Retirement?

For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.

That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. Inflation spiked 7.5% in January 2022, the highest annual increase in 40 years.

Two-thirds of older Americans are worried that inflation will negatively impact their inflation, according to a survey by American Advisors Group . However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.

What Is Inflation?

Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living including, such as gas for your car, groceries, home expenses, medical care and transportation. Inflation may occur in specific segments of the economy or across all segments at once.

There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.

When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.

When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.

Concerns about inflation may even push back the age at which some people think they can afford to retire.

How Can Inflation Impact Retirement?

Inflation eats away at the value of each individual dollar, including savings and investments, so it’s important to keep in mind the inflation rate for retirement planning. There are several strategies you can use when investing during inflation.

For those saving for retirement, it’s important to keep in mind that the cost of living in the future will be higher than it is today. For example, if rent costs $1,000 today but next year if there’s inflation, that cost could rise to $1,100. Over a decade or more, that price could double or triple.

5 Ways to Minimize the Impact of Inflation on Retirement

While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the risk of inflation.

1. Invest Your Savings in the Stock Market

Investing in stocks is a great way to fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been roughly 13%. Even when inflation is factored in, investors still have substantial returns when investing in stocks.

However, stocks are risk assets, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to equities to manage market risk.

One way to potentially determine the percentage of a retirement investment portfolio that should go towards stocks is to subtract your age from 100. For example, if you are 70 years old, a 30% allocation toward stocks may be suitable, but this can range depending on your risk tolerance and other sources of income.

2. Use Tax-Advantaged Retirement Vehicles

One of the ways retirees can increase their purchasing power is to reduce the amount of their money they need to pay in taxes. For example, a traditional 401(k) retirement account is not taxed until money is withdrawn from it.

Tax-advantaged retirement accounts are beneficial for retirees because the money grows tax-free. In 401(k)s and most Individual Retirement Account (IRA), you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket. With Roth IRAs, you’ll pay taxes on the money you put into the account, but it will be tax-free in retirement.

3. Do Not Over- Allocate Long-Term Investments With a Low Rate of Return

Risk averse investors may be tempted to stay invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower risk investors take, the lower the reward. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.

While they offer a guaranteed return, for example high-yield savings accounts typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.

That’s why even retirees may want to keep a portion of their investments in the stock market.

4. Buy Inflation-Protected Securities

Treasury inflation-protected securities or TIPS are backed by the federal government and help protect investments against inflation. The principal value of the investment increases when inflation goes up and if there’s deflation the principal adjusts lower per the consumer price index.

TIPS have fixed coupon rates based on the principal value of the investment. When inflation increases, the value of the principal rises and the coupon payment will increase. Investors consider these bonds among the safest investments because they are issued by the U.S. Treasury and backed by the full faith of the U.S. government.

5. Buy Real Estate

Retirees may also consider investing in real assets. Real estate is often a good inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it can also increase in value. One of the daily costs impacted by inflation is the cost of housing.

That’s why rental income from real estate historically has kept up with inflation. Investing in real estate as a real asset or even in real estate investment trusts (REITs), can be a great way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income.

Inflation Calculator for Retirement

It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator, like this one from the Department of Labor, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.

The Takeaway

While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments aimed at minimizing the impact of inflation can help. Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.

With inflation rising, starting to save for retirement as early as possible can help you accrue the compounded returns necessary to counteract rising prices in the future. One way to get started is by opening an IRA account on the SoFi Invest® brokerage. Users can open a Roth or traditional IRA with SoFi Invest.

FAQ

Is inflation good or bad for retirees?

A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings.

How can I protect my retirement savings from inflation?

There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS, real estate, and investments that provide a high rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).

Does your pension increase with inflation?

Some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.

Photo credit: iStock/RgStudio

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Feb
17
2022
Your Guide to Keogh Plans and How They Work

Your Guide to Keogh Plans and How They Work

By | invest, Investing, Preparing for Retirement | Comments Off on Your Guide to Keogh Plans and How They Work

Keogh retirement plans are one type of tax-deferred retirement plan that self-employed individuals and their employees use to invest and grow their savings. Although they’re relatively uncommon today,

Keogh plans are still an option that some high-income savers may use to save for their golden years, however a tax law change in 2001 that made other options more appealing has resulted in declined use of such plans.

The IRS now refers to Keogh accounts as HR-10s or qualified retirement plans. For most self-employed individuals, however, there are other savings options that offer similar benefits with a lower administrative burden for the account holder.

Keogh Plan Definition

A Keogh plan is a type of retirement plan available to self-employed individuals and their employees. Those eligible to establish a Keogh plan include partnerships, small businesses, sole proprietorships, and limited liability companies (LLCs). Once set up, employers fund Keogh plans are employer-funded and with tax-deferred contributions.

Keogh plan rules require that if you set up a Keogh and you have employees, you must set up Keogh plans for any workers who have logged at least 1,000 hours for you over the past three years.

Referred to as qualified plans or HR-10s by the IRS, Keogh plans have some similarities to 401(k)s. However, Keogh plans differ from 401(k)s because of their high annual contribution limits, particularly for small businesses.They work best for specific categories of self-employed individuals, such as financial professionals, dentists, and lawyers.

In recent years, Keogh plans have fallen out of favor, with most self-employed workers opting for Solo 401(k)s or SEP IRAs instead.

What Is a Keogh Plan?

Like other types of retirement plans, you contribute money to a Keogh plan to grow for retirement under a tax shelter. The Keogh plan then uses those funds to invest in various assets, like exchange-traded funds (ETFs), bonds, or stocks.

You can make these contributions to a Keogh to lower your taxable income because you make these contributions before taxes. You deduct the amount contributed from your taxes each year you do so. As a result, taxes on the plan’s total value only come due once you start making withdrawals in retirement.

Keogh Withdrawals

Once you hit age 59 ½, you become eligible to withdraw from your Keogh plan. You can determine how you want to receive your money when you retire, either in one lump sum or installments. It is also up to you how much you receive in each installment and their payment frequency.

There are consequences if you withdraw early or delay, though. Taking money out of your plan before age 59 ½ typically results in a 10% penalty along with income tax. Once you hit 70 ½, you must take distributions from the account. If not, you incur a 50% penalty tax on the withdrawal you should have taken.

These are the same early withdrawal penalties you see in more popular tax-deferred retirement accounts, including traditional IRAs and 401(k)s.

Types of Keogh Plans

When starting a retirement fund, you will encounter multiple options. Keogh plans also come in different forms, and one may suit you more than the other. These are the two variations you should know:

Defined-Contribution Plans

A defined-contribution plan requires you to decide how much money you put into the fund each year. You can do this either through profit-sharing or money purchasing. Your business pays into the account along with the former, whereas the latter means you contribute a fixed amount of income annually.

In 2022, profit-sharing allows you to contribute up to 100% of your compensation or $61,000, whichever is less. However, you can decide your contribution amount each year with a profit-sharing plan.

Alternatively, a money-purchase plan lets you choose your Keogh plan contribution limit from the outset. Limits cannot be changed. It also abides by the same IRS limits as a profit-sharing plan.

Defined-Benefit Plans

Defined-benefit plans are pension plans based on your years of employment and your salary. They prioritize guaranteed, set benefits, so you choose a pension goal and then put money in the account to fund it. For 2022, your annual benefit cannot exceed $245,000 or 100% of your mean compensation over your three highest consecutive calendar years, whichever is less.

These plans typically involve complex calculations to find the right balance of contribution and investment. They use personal factors like age and return goals to inform these calculations.

Pros of Keogh Plan

There are certain advantages to Keogh plans which may make them a retirement option for self-employed individuals to consider. For example, Keogh plans are a versatile savings vehicle. Depending on your retirement goals, you can open one as a defined-benefit or defined-contribution plan.

In addition, Keogh plans come with high contribution limits. So, they appeal to people who want to pursue more aggressive saving strategies.

Cons of Keogh Plan

Keogh plans do face their share of limitations. For example, they are restricted to self-employed workers and specific types of self-employed persons. Common-law employees, partners, and independent contractors cannot open a Keogh plan. Only those who work for or own an unincorporated business can qualify.

Keogh plans also require substantial administrative paperwork compared to other retirement accounts like traditional IRAs or a SEP IRA. Many times, someone opening a retirement plan can do so on their own. But a Keogh plan requires complex calculations that may require professional help.

Keogh Plan vs 401(k)

Keogh plans are less popular these days than alternatives like a 401(k) plan. Although the two share some traits, certain factors give 401(k) an advantage.

A 401(k) is a commonly offered employer-sponsored retirement plan based on the defined-contribution format. In 2022, most participants can contribute up to $20,500 in 2022. Participants 50 and older can contribute an additional $6,500.

That means 401(k) participants have lower contribution limits than those in a defined-benefit Keogh plan, who can contribute up to $245,000 for 2022.

But Keogh plans have a limited reach. They are only available to self-employed individuals and their employees. On the other hand, 401(k) plans are widely accessible to workers. So whether you work in a traditional office setting or freelancing, you may have the opportunity to open a 401(k).

Self-employed workers can open an individual 401(k), also called a solo 401(k) or a one-participant 401(k). This qualified retirement plan functions almost identically to traditional 401(k)s. So, self-employed individuals can contribute the standard contribution limit ($20,500 for 2022) and an additional 25% of net earnings.

Also, Keogh plans tend to come with administrative burdens that 401(k)s do not. So, the latter is generally easier to set up and consistently manage.

Keogh Plan

401(k)
Choice between defined-contribution plan or defined-benefit plan Defined-contribution plan only
Pre-tax contribution and taxed withdrawals Pre-tax contributions and taxed withdrawals
No loans Can take a loan out on the balance
Withdrawal age starts at age 59 ½ Withdrawal age starts at age 59 ½
Withdrawals required by age 72 Withdrawals required by age 72 unless working
Higher contribution limits (with defined-benefit plan) Accessible to wider range of companies, including owners or self-employed workers

The Takeaway

Regardless of which type of retirement account you use, it’s important to start saving for retirement as soon as possible. The earlier you start, the more time you’ll have to benefit from compound returns as your savings grow through the decades.

While SoFi does not offer Keogh plans, it does allow users to start saving for retirement. Once you open an account on the SoFi Invest® online brokerage, you can start saving for retirement via a traditional individual retirement account, a Roth IRA, or a SEP.

FAQ

Who qualifies for a Keogh plan?

Keogh plans are for self-employed workers and their employees. You are eligible to open a Keoph as long as you operate as a small business owner, partner, sole proprietorship, or limited liability company (LLC). However, independent contractors, common-law employees, and single members of a partnership cannot open a Keogh plan.

What is the difference between a Keogh plan and a 401(k)?

Both Keogh plans and 401(k)s are retirement savings vehicles, but they have different eligibility rules, contribution limits, and administrative requirements. Keogh plans are solely for self-employed workers, have higher contribution limits (with defined-benefit plans), and come with more administrative paperwork.

In comparison, 401(k)s are available to a broader range of workers, including company-salaried employees and self-employed individuals. They have lower contribution limits, but they are simple to set up.

Are Keogh plans still available?

Keogh plans are still available, although you may hear them called qualified plans or HR-10s. They are only available to self-employed workers and their employees, though.

Photo credit: iStock/Weekend Images Inc.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Feb
15
2022
Understanding the Employee Retirement Income Security Act (ERISA)

Understanding the Employee Retirement Income Security Act (ERISA)

By | invest, Investing, Preparing for Retirement | Comments Off on Understanding the Employee Retirement Income Security Act (ERISA)

If private sector employers choose to offer retirement plans to their employees, those plans must follow standards established by the federal Employee Retirement Income Security Act, better known as ERISA.

ERISA guidelines require that workplace retirement plans meet certain minimum standards regarding plan information and the protection of plan assets. The Act also grants certain rights to workers who save for retirement on the job through qualified retirement plans.

What Is the Employee Retirement Income Security Act (ERISA)?

The Employee Retirement Income Security Act or ERISA is a federal law that establishes minimum standards for most retirement and health plans voluntarily established by private companies. Essentially, ERISA is a law that protects retirement assets as well as plan participants and their beneficiaries.

Signed into law in 1974 by President Gerald Ford, ERISA has had several amendments in the decades since to expand its protections and provisions. There are three entities responsible for administering and enforcing ERISA requirements on private employers:

•   Employee Benefits Security Administration

•   Internal Revenue Service

•   Pension Benefit Guaranty Corporation

The Employee Benefits Security Administration is a division of the U.S. Department of Labor, while the Internal Revenue Service falls under the umbrella of the Treasury Department.

ERISA, Explained

ERISA doesn’t require employers to offer retirement plans to employees but it does require employers who do to meet certain standards. Specifically, under ERISA guidelines employers must:

•   Provide plan participants with information about the plan, including its features and how it’s funded

•   Follow a fiduciary standard in administering the plan and plan assets on behalf of participants

•   Establish a grievance and appeals process for participants to get benefits from their plans

•   Allow employees to sue for benefits or in the case of a breach of fiduciary duty

So, for example, if you’re enrolled in a retirement plan at work your employer must provide you with documents outlining the different 401(k) fees you’ll pay. They must also give you written notice of upcoming plan changes before they take place. If you think your plan administrator is abusing plan assets in violation of their fiduciary duty, you could sue for damages.

Types of ERISA Plans

Qualified retirement plans covered by ERISA include defined benefit plans and defined contribution plans. Defined benefit plans, often referred to as pension plans, offer a set retirement benefit to workers. Defined contribution plans pay out a retirement benefit determined by an employee’s elective salary deferrals and/or retirement contributions made by the employer. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.

ERISA also covers certain health benefits. For example, the Consolidated Omnibus Budget Reconciliation Act (COBRA) is an amendment to ERISA that allows employees the right to continue their employer’s health care coverage for a set period of time after leaving employment under circumstances. Flexible Spending Accounts (FSAs) also fall under ERISA guidelines, though Health Spending Accounts (HSAs) typically do not.

History of ERISA

Congress developed ERISA guidelines in response to public concerns over the mismanagement and abuse of private pension plans. The 1950s and 1960s saw these plans increase in popularity, prompting the Kennedy administration to establish the Committee on Corporate Pension Funds in 1962.

A report published by the Committee estimated that by the end of 1964, private pension funds had accumulated $75 billion in assets. This, along with the increased use of private pension plans among unions, led the Committee to suggest a need for greater federal oversight and regulation.

A documentary released in 1972 brought several instances of pension plan abuse to light, leading Congress to pass ERISA in 1974. Subsequently, Congress also passed the following amendments to the law:

•   The Retirement Equity Act of 1984

•   The Consolidated Omnibus Reconciliation Act of 1985

•   The Federal Employees’ Retirement System Act in 1986

•   The Health Insurance Portability and Accountability Act in 1996

•   The Patient Protection and Affordable Care Act in 2010

These amendments, along with others aimed at women and children, have expanded ERISA requirements and protections to millions of workers in the United States and their families.

ERISA Guidelines & Requirements

Employers who offer qualified retirement plans covered by ERISA must administer them in accordance with ERISA guidelines. Some of the key points include:

•   Making information about the plan readily available to plan participants, including investment options, fees and any scheduled changes to the plan terms

•   Establishing minimum standards for participation in an eligible plan

•   Determining vesting requirements and establishing a vesting schedule for employees who contribute and/or receive employer matching contributions

•   Ensuring plan administrators adhere to a fiduciary standard when managing plan assets on behalf of employees

•   Guaranteeing payment of benefits after a plan termination

•   Establishing a process through which employees can file grievances or lawsuits against the plan to get benefits or make a claim for breach of fiduciary duty

In other words, ERISA exists to protect the money you save in your workplace retirement plan from any form of abuse and to make sure you understand your plan and have access to the benefits in the plan.

Who Is ERISA Eligible?

ERISA extends to qualified plans and employees who participate in them. Specifically, this includes employees of private companies such as:

•   Corporations (both C- and S-corp companies)

•   Limited liability companies

•   Partnerships

•   Non-profit organizations

ERISA does not extend to employees of religious organizations or churches, nor does it cover companies that operate outside of the United States. The Thrift Savings Plan (TSP), which is a retirement plan that’s open to federal employees and U.S. military personnel, is not covered by ERISA either.

What Does ERISA Cover?

There are several types of retirement plans that can fall under ERISA guidelines. ERISA retirement plan protections are extended to:

•   401(k) plans (including traditional 401(k), safe harbor 401(k) and SIMPLE 401(k) plans)

•   403(b) plans

•   SIMPLE IRA plans

•   SEP IRA plans

•   Employee stock ownership plans (ESOP)

•   Profit-sharing plans

•   Defined benefit plans (i.e. pensions)

Unlike 401(k)s, traditional or Roth IRAs are not subject to ERISA, since they’re typically administered by individuals rather than corporations.

Recommended: What’s the Difference Between a 401(k) and an IRA?

Employer Fiduciary Under ERISA

One of the most important provisions of ERISA centers on fiduciary responsibility. The fiduciary duty standard requires that those who act as fiduciaries do so in a way that promotes the best interests of the individuals whose assets they’re managing.

What this means, in simple terms, is that plan administrators can’t do anything they like with the assets in a qualified plan. Instead, they have to manage those assets in a way that promotes the best interests of the plan participants. This includes things like:

•   Acting prudently when making investment decisions

•   Monitoring investment options

•   Diversifying plan assets in order to manage risk

•   Following the terms of the plan in accordance with ERISA standards

•   Avoiding conflicts of interests

For example, a plan administrator can’t use plan assets to make an investment that would benefit them personally, nor could they recommend an asset to the plan in which they have a business or personal interest. Such actions could constitute a breach of fiduciary duty and they could be grounds for a lawsuit brought by the plan participants.

ERISA does not mandate a specific rate of return within a 401(k), but it does ensure that administrators act in the best interest of participants.

What Are ERISA Violations?

ERISA violations are actions that violate the standards and guidelines established by the Act. The Department of Labor specifies which actions constitute civil ERISA violations and which ones are criminal in nature.

Civil violations of ERISA include:

•   Failing to operate the plan according to the fiduciary standard

•   Using plan assets for personal gain

•   Improperly valuing plan assets or failing to hold plan assets in trust

•   Not following the terms of the plan

•   Not performing due diligence in selecting and monitoring service providers

•   Taking adverse action against an employee who exercises their rights under the plan

•   Failing to comply with ERISA Part 7 and the Affordable Care Act in the case of welfare benefit plans, such as FSAs

Meanwhile, criminal ERISA violations include:

•   Embezzling money from the plan

•   Offering kickbacks

•   Making false statements

•   Concealing facts or documents

•   Coercion

Punishments for civil and criminal ERISA violations range from fines to jail time, with repeat violations punished more harshly.

The Takeaway

Contributing to a retirement plan at work could help you to achieve your long-term financial goals. ERISA lays out guidelines that your company must meet if they choose to offer such a plan.

If you don’t have a retirement plan at work, you do still have options for saving. You can open an Individual Retirement Account (IRA) or invest through a taxable brokerage account. Take the next steps toward securing your retirement by opening an account on the SoFi Invest® investment app.

FAQ

What is the main purpose of the ERISA?

The main purpose of ERISA is to protect employees who save in qualified retirement plans at work. Congress passed ERISA after private pension plan abuses left many workers shortchanged in terms of their retirement savings.

What does ERISA compliance mean?

ERISA compliance means an employer offers one or more qualified plans in accordance with ERISA guidelines. Employers who violate ERISA rules can face penalties, including fines and possibly jail time for severe or repeat violations.

Who can sue under ERISA?

Employees who participate in a qualified retirement plan or health plan covered by ERISA can sue if they believe their company has unfairly denied them access to their benefits or that a breach of fiduciary duty has occurred.

Photo credit: iStock/FG Trade

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

SOIN0122012

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Feb
15
2022
What is a Glide Path?

Guide to Glide Paths for 401k

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Glide Paths for 401k

Asset managers use a “glidepath” to determine who the asset allocation of a target-date retirement fund will change based on the number of years until the fund’s target date. Each target-date fund has its own glide path, though they typically begin with a more aggressive allocation that gets more conservative over time.

The idea behind most target date fund glide paths is that investors with a longer-term time horizon should have a higher percentage of their portfolio in riskier assets, like stocks, since they have time to recover from short-term volatility. As their retirement date approaches (or once they’ve started retirement), they likely will benefit from a more conservative portfolio that protects the assets they’ve already accumulated.

What Is a Glide Path?

The glide path is the formula that asset managers choose when they put together a target-date mutual fund that determines how and when that portfolio will adjust its asset allocation over time.

Target-date funds (and their glide paths) are common investment choices in 401(k) accounts, as well as in other types or retirement accounts, such as a Roth or traditional IRA purchased through a brokerage account.

Recommended: What’s the Difference Between a 401(k) and an IRA?

A key component to saving for retirement is having a suitable mix of investments that allow for portfolio diversification. Early on, most glide paths focus on stocks that offer the greatest potential to grow in value over time and shifts to bonds and other fixed-income investments according to the investors risk tolerance to manage volatile price swings as retirees or those who are approaching retirement grow older.

Understanding Glide Path

The glide paths within target-date funds create a set-it-and-forget-it investing option for retirement savers, who can get diversification based on their time horizon within a single fund. Investors who are younger and have 20 to 30 years until retirement typically need to maximize their portfolio growth, which requires a much higher allocation toward stocks.

By comparison, someone who has already retired may need to scale back on their portfolio risk. Glide path investing automatically reallocates the latter investor’s portfolio toward bonds which are typically lower risk investments with lower returns compared to stocks but provide portfolio stability. That also means that younger investors in a target-date fund will typically have higher 401(k) returns than older investors.

Types of Glide Paths for Retirement Investing

There are different glide path strategies depending on an investor’s risk tolerance and when they plan to retire. Typically, target-date funds have a declining glide path, although the rate at which it declines (and the investments within its allocation vary depending on the fund).

Declining Glide Path

A declining glide path reduces the amount of risk that a target-date fund takes over time. In general, it makes sense for retirees or those approaching retirement to reduce their investment risk with a more conservative portfolio as they age. A decreasing glide path is the more common approach used which involves a higher equity risk allocation which steadily declines as retirement approaches.

Static Glide Path

Some target-date funds may have a static glide path during some years. During this time, the investment mix would remain at a set allocation, such as 60% stocks and 40% bonds. Managers maintaining portfolios that have a static glide path rebalance them regularly to maintain this allocation.

Rising Glide Path

Some researchers believe that the glide path should begin to rise again once an investor reaches retirement age, taking on more risk over time.This argument holds that by increasing risk in a retiree’s portfolio could reduce volatility in the early stages of retirement when the portfolio is at risk of losing the most wealth in the event of a stock market decline.

An increasing glide path may work for retirees with pension benefits or higher withdrawal rates or who is working in retirement. If a retiree is comfortable taking on more risk, this strategy may make sense, however, generally speaking, the rising glide path is the least utilized method for retirement planning.

Choosing the Right Glide Path

If you’re saving for retirement in a 401(k), there may only be one target-date option available to you based on your target-retirement age. However, if you have choices within your 401(k) or you’re choosing a target-date fund within an individual retirement account or another investment vehicle, you’ll want to look for a target-date fund with a strategy that aligns with your investment view.

One rule of thumb uses “rule of 100,” which subtracts the investor’s age from 100 to determine the percentage of your portfolio that should be in stocks. However, some managers use glide paths that decline more or less quickly than that.

Some target-date funds also incorporate alternative assets, such as private equity or real estate, in addition to traditional stocks and bonds.

”To” or “Through” Retirement

When glide paths reach retirement date, they can take one of two approaches, either a “To” or “Through” approach. A “To” retirement glide path is a target-date fund strategy that reaches its most conservative asset allocation when retirement starts. This strategy holds lower exposure to risk assets during the working phase and at the target retirement date. This means, at retirement, it reduces exposure to riskier assets, like equalities, and moves into more conservative assets, like bonds.

“Through” glide paths tend to maintain a higher allocation toward riskier assets as investors accumulate savings, at their target retirement date and years into retirement. This means exposure to equities in retirement tends to be higher, at least in the first few years of retirement.

In making which path is best suited for each investor, you must determine your risk preference and how aggressive or conservative you are able to be. This includes deciding how much exposure to equities you can afford to have. Decreasing exposure to stocks means investors don’t have to worry about a portfolio that fluctuates in value, whereas, an increased exposure to equities may mean a portfolio with more volatility but over time, it has potential for greater gains.

The Takeaway

Glide paths are formulas that investment managers create to determine the level of risk in a target-date fund. This allows investors in those funds to take a hands-off approach with a portfolio that automatically adjusts itself based on risk tolerance that changes as investors age.

SoFi does not currently offer target-date funds, but it does provide an opportunity to open an IRA account through the SoFi Invest® online brokerage. SoFi Automated investing offers automated, algorithm-driven financial planning that creates and rebalances a portfolio on your behalf.

FAQ

What does glide path approach mean?

A glide path refers to a formula that asset managers use to determine the allocation mix of assets in a target-date retirement portfolio and how it changes over time. A target-date retirement portfolio tends to become more conservative as the investor ages, but there are multiple glide paths to take account to a retiree’s risk tolerance.

What is a retirement glide path?

A retirement glide path is the approach within a target-date fund that includes a diversified portfolio of stocks and bonds. Retirement glide paths typically start out with a more aggressive mix of investments and get more conservative over time.

Which type of mutual fund follows a glide path?

Target-date retirement funds are the most common type of mutual fund that follows a glide path. However managers may also use glide paths for other time-focused, long-term investments, such as 529 retirement accounts.

Photo credit: iStock/akinbostanci
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

SOIN0122013

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