THE NATIONS' CAPITAL; Understanding retirement benefit choices


VISTA, Calif. -- Many tribal governments have yet to establish retirement
benefits for their employees and members. With major employers such as
General Motors, Ford and IBM making huge adjustments to retiree benefits,
it is time to look at the cost/benefit structure of two main types of
retirement plans.

Most people work to provide a comfortable lifestyle for themselves and
their families. In the past era of lifelong employment, the retired worker
could reasonably sustain his livelihood with a company pension and Social
Security benefits. But the employment landscape has changed. By 2002,
according to the Department of Labor, the average American worker will
change jobs nine times before reaching age 32.

Employers are required to pay into the Social Security system for all
employees who make more than $50 per quarter, but there is no requirement
for employers to provide retirement benefits. When the employee turnover
rate is high, one can't blame employers for not wanting to provide any
additional benefits.

Social Security was intended to provide a safety net for retired or
disabled American workers and their dependents. Today, Social Security pays
a maximum of $2,053 per month, based on a worker earning salaries in the
equivalent of $7,850 per month.

For a retiree who wants to sustain a pre-retirement lifestyle, Social
Security can only meet one-third of the retiree's projected expenses.
Therefore, having a retirement fund is absolutely necessary. Approximately
60 percent of employers recognize this, and provide some form of retirement

Employer sponsored retirement plans come in two forms: Defined benefit and
defined contribution.

* Defined benefit plans

The pension system implied reciprocal loyalty between employees and
employers. After 10, 20 or 30 years of work, employers provide retired
workers with a defined level of income benefit for life. The benefits are
based upon pre-retirement wages and salaries. Military and civil services
offer benefits like these. Since the annual maximum contribution exceeds
$100,000, this is also a plan favored by high-income solo practice
professionals such as doctors, lawyers and athletes.

With defined benefit plans, employees usually do not put any of their own
salary into their retirement account. Many government systems allow
eligible employees to buy additional benefits, but only after five or 10
years of service.

The employer is responsible for managing the pool of retirement money, from
setting aside enough funds each year to selecting investments and
distributing benefits. The total pension obligation depends on the number
of employees expected to reach retirement age, the amount promised each
retiree and the investment return.

Employers had sometimes miscalculated their obligations, resulting in
disastrous deficits. The city of San Diego is now struggling with a $1
billion pension deficit. For several years, someone did the math wrong and
the trustees overlooked the mistake. Now, the city is responsible for
making up the difference to retirees and employees. Reneging on pension
payments is like refusing to pay debts. Political candidates in the recent
mayoral and council election have offered solutions, from borrowing money
with municipal bonds to making up the deficit and reducing retiree

* Defined contribution plans

In 1980, tax code section 401(k) went into effect. Benefits consultant Ted
Benna used the section to design a voluntary salary deferral plan. It was
attractive to many employees back then because of higher-income tax
brackets. Under the 401(k) plan, employees could defer part of their
earnings, up to a specific dollar limit, each year. In 2006, employers can
contribute up to 25 percent of the employee's salary, or $29,000, whichever
is lower. Employees can defer up to $15,000. Employees age 50 or older can
defer up to $20,000.

By 1986, the government imposed shorter vesting periods and portability.
Maintaining a defined benefit plan requires annual calculations of
actuarial statistics and projected return, based upon each eligible
employee. Thus, administrative costs were expensive.

Employers began to make use of 401(k) plans to provide a defined percentage
of employees' salary as contributions for their company retirement plans.
Employers could elect to give all eligible employees a fixed percentage or
match employees' minimum contributions. In addition, the employer could
specify how long the employee must stay in order to get 100 percent of the
match. The "vesting" schedule outlined percentages that could be taken by
employees after each year of service. Currently, the IRS stipulates a
period of six year maximum on vesting. When an employee left a job, the
money they had put into the account and the amount vested was portable and
could be transferred out.

For example, an employer establishes a 401(k) plan that provides a 3
percent salary match with one-year vesting. For an employee making $30,000
a year, it means the employee must put in at least $900 into a 401(k)
account in order to get the $900 match from the employer. If the employee
leaves the job after one year, $1,800 can be transferred out. However, if
the employee leaves the job within the year, only the employee's salary
deferral of $900 can be taken out.

Unlike defined benefit plans, the employer is only responsible for making
the promised contribution into the employee's account. Employees are
responsible for understanding how much they need to fund their own
retirement needs and managing the assets. Making the minimum contribution
to get the employer match is rarely enough to fund realistic retirement

Assuming an 8 percent investment return and a lifespan of 20 years beyond
retiring at age 65, a 25-year-old needs to save 11 percent from their
paycheck. A 35-year-old needs to put away 17 percent, a 45-year-old needs
to put away 30 percent and a 55-year-old needs to put away 73 percent.

Starting this year, the Roth 401(k) is available. Employers' contribution
requirements are unaffected. Employees' contributions can be
salary-deferred or post-taxed. In the former situation, the employee will
have to pay income taxes on the entire amount upon withdrawal from the
plan. In the latter case, growth and principal from the taxed portion of
the plan will not be taxed, as long as withdrawals are taken out after age
59- or for legitimate reasons.

While the 401(k) plan requires less administration than defined-benefit
plans, SIMPLE IRA plans are the least expensive to administer. It is
available only for organizations with fewer than 100 employees. SIMPLE IRA
plans offer benefits similar to the traditional 401(k). Employers can elect
to provide all eligible employees with a 2 percent salary benefit, or match
by 3 percent. In 2006, employees can salary-defer $10,000. Employees age 50
or older can defer up to $12,500.

Statistics from the December 2002 U.S. Census Bureau reported that only 41
percent of workers between the ages of 25 and 64 have any retirement
savings. The average savings is $33,000 -- barely 1.25 percent of what's
needed for someone who's 45 years old and accustomed to a $30,000-per-year
lifestyle. Employer-sponsored plans may be providing a false sense of
security for workers. Therefore, becoming educated is a moral obligation
for employers and a necessity for employees.

Cynthia Tam, CFP, sets up investment and benefits programs for tribes. She
can be reached at or (619) 200-6277. CA 0D69514.
Securities offered through Investors Capital, member NASD/SIPC. Advisory
Services offered through Investors Capital Advisory, 230 Broadway,
Lynnfield, MA; (800) 949-1422.