a look at 401k plan fees

Transcript

1 U.S. Department of Labor Employee Benefits Security Administration

2 This publication has been developed by the U.S. Department of Labor, fi ts Security Administration. Employee Bene To view this and other EBSA publications, visit the agency’s Web site at: www.dol.gov/ebsa To order publications or to request assistance from a bene fi ts advisor, contact EBSA electronically at: www.askebsa.dol.gov Or call toll free: 1-866-444-3272 This material will be made available in alternative format to persons with disabilities upon request: Voice phone: (202) 693-8664 TTY: (202) 501-3911 This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. Updated August 2013

3 U.S. Department of Labor Employee Benefits Security Administration

4 Table of Contents 1 Introduction... ... 1 Why consider fees?... ... 1. 2. What are 401(k) plan fees and who pays for them?... 2 What fees are associated with my investment choices in a 401(k) plan?... 3. 4 4. Where can I get information about the fees and expenses charged to my 401(k) plan 6 account?... ... 7 What other factors might impact the fees and expenses of my 401(k) plan?... 5. 8 Is there a checklist I can use to review my 401(k) plan’s fees?... 6. 9 What other sources of information are available?... 7.

5 Introduction More and more employees are investing in their futures through 401(k) plans. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments. If you are among those who direct your investments, you will need to consider the investment objectives, the risk and return characteristics, and the performance over time of each investment option offered by your plan in order to make sound investment decisions. Fees and expenses are one of the factors that will affect your investment returns and will impact your retirement income. The information contained in this booklet answers some common questions about the fees and expenses that may be paid by your 401(k) plan. It highlights the most common fees and encourages you, as a 401(k) plan participant, to:  Make informed investment decisions;  Consider fees as one of several factors in your decision making;  Compare all services received with the total cost; and  Realize that cheaper is not necessarily better. ed explanation of some common 401(k) fees. Keep in mind, however, that this booklet is a simpli fi It is not a legal interpretation of the nation’s major retirement bene fi ts protection law, the Employee Retirement Income Security Act (ERISA), or other laws, nor is this information intended to be investment advice. 1. Why consider fees? In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account which will reduce your retirement income. The following example demonstrates how fees and expenses can impact your account. Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, 1

6 however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent. In recent years, there has been a dramatic increase in the number of investment options typically offered under 401(k) plans as well as the level and types of services provided to participants. These changes give today’s employees who direct their 401(k) investments greater opportunity than ever before to affect their retirement savings. As a participant you may welcome the variety of investment options and the additional services, but you may not be aware of their cost. As shown above, the cumulative effect of the fees and expenses on your retirement savings can be substantial. fi c obligation to consider the fees and You should be aware that your employer also has a speci expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the fi ciaries. Among other things, this means that employers interest of the plan participants and their bene must:  Establish a prudent process for selecting investment options and service providers;  Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;  Select investment options that are prudent and adequately diversi fi ed;  Disclose plan, investment and fee information to participants to make informed decisions regarding their investment options under the plan; and  Monitor investment options and service providers once selected to make sure that they continue to be appropriate choices. 2. What are 401(k) plan fees and who pays for them? If you want to know how fees affect your retirement savings, you will need to know about the different types of fees and expenses and the different ways in which they are charged. 401(k) plan fees and expenses generally fall into three categories: The day-to-day operation of a 401(k) plan involves expenses for basic Plan administration fees. administrative services – such as plan recordkeeping, accounting, legal and trustee services – that are necessary for administering the plan as a whole. Today, a 401(k) plan also may offer a host of additional services, such as telephone voice-response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and online transactions. 2

7 In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. Otherwise, if administrative costs are separately charged, they will be borne either by your employer or charged directly against the assets of the plan. When paid directly by the plan, administrative fees are either allocated among participant’s individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a fl at fee against each participant’s account. Either way, generally the more services provided, the higher the fees. Investment fees. By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. (See pages 4-6 for more information on investment-related fees.) Individual service fees. In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of participants who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions. 401(k) plan investments and services may be provided through a variety of arrangements: Employers may directly provide, or separately negotiate with and hire different providers for, some or all of the various services and investment alternatives offered under their 401(k) plans (sometimes referred to as an unbundled arrangement). The expenses of each provider (i.e., investment manager, trustee, recordkeeper, communications fi rm) are charged separately. In many plans, some or all of the various services and investment options may be offered by one provider for a fee paid to that provider (sometimes referred to as a bundled arrangement). The provider will then pay out of that fee any other service providers that it contracts with to provide the services. Some plans may use an arrangement that combines a single provider for certain services, such as administrative services, with a number of providers for investment options. Regardless of the arrangement used, fees need to be evaluated, keeping in mind the cost of all covered services. 3

8 3. What fees are associated with my investment choices in a 401(k) plan? Apart from fees charged for administration of the plan itself, there are three basic types of fees that may be charged in connection with investment options in a 401(k) plan. These fees, which can be referred to by different terms, include: Sales charges (also known as loads or commissions ). These are transaction costs for  buying and selling of shares. They may be computed in different ways, depending upon the particular investment product. Management fees investment advisory fees or account maintenance (also known as  fees ). These are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of fi the investment product. Investment products that require signi cant management, research and (See page 7.) monitoring services generally will have higher fees.  This category covers services, such as recordkeeping, furnishing statements, Other fees. toll-free telephone numbers and investment advice, involved in the day-to-day management of fl at fee or as a percentage of the amount of investment products. They may be stated either as a assets invested in the fund. In addition, there are some fees that are unique to speci fi c types of investments. Following are brief descriptions of some of the more common investments offered under 401(k) plans and explanations of some of the different terminology and unique fees associated with them. Some Common Investments and Related Fees Most investments offered under 401(k) plans today pool the money of a large number of individual fi t investors. Pooling money makes it possible for individual participants to diversify investments, to bene from economies of scale and to lower their transaction costs. These funds may invest in stocks, bonds, real estate and other investments. Larger plans, by virtue of their size, are more likely to pool investments fi nancial institution. Smaller plans on their own – for example, by using a separate account held with a fi nancial institutions. Generally, generally invest in commingled pooled investment vehicles offered by investment-related fees, usually charged as a percentage of assets invested, are paid by the participant. Mutual funds pool and invest the money of many people. Each investor owns shares in Mutual funds. the mutual fund that represent a part of the mutual fund’s holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a speci fi c investment policy. In addition to investment management and administration fees, you may nd these fees: fi Some mutual funds assess sales charges (see above for a discussion of sales charges). These  front-end load charges may be paid when you invest in a fund (known as a ) or when you sell 4

9 shares (known as a deferred sales charge or redemption fee ). A front- , back-end load end load is deducted up front and, therefore, reduces the amount of your initial investment. A back-end load is determined by how long you keep your investment. There are various types of back-end loads, including some which decrease and eventually disappear over time. A back-end load is paid when the shares are sold (i.e., if you decide to sell a fund share when a back-end load is in effect, you will be charged the load).  Rule 12b-1 fees , which are ongoing fees Mutual funds also may charge what are known as paid out of fund assets. Rule 12b-1 fees may be used to pay for commissions to brokers and other salespersons, to pay for advertising and other costs of promoting the fund to investors and to pay various service providers of a 401(k) plan pursuant to a bundled services arrangement. Some mutual funds may be advertised as “no-load” funds. This can mean that there is no front- or back- end load. However, there may be a 12b-1 fee.  , which are often mutual funds, hold stocks, bonds, and cash Target date retirement funds investments. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. Target date funds may charge different fees even with the same target date. If a target date fund invests in other mutual funds (often called a “fund-of-funds”), fees may be charged by both the target date fund and the other funds. A collective investment fund is a trust fund managed by a bank or Collective investment funds. trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. For example, if a collective investment fund holds $10 million in assets and your investment in the fund is $10,000, you have a 0.1 percent interest in the fund. Like mutual funds, collective investment funds may have different investment objectives. There are investment management and administrative fees associated with a collective investment fund. Insurance companies frequently offer a range of investment options for 401(k) Variable annuities. plans through a group variable annuity contract between an insurance company and an employer on behalf of a plan. The variable annuity contract “wraps” around investment options, often a number of mutual funds. Participants select from among the investment options offered, and the returns to their individual accounts vary with their choice of investments. Variable annuities also include one or more insurance elements, which are not present in other investment options. Generally, these elements include an annuity feature, interest and expense guarantees, and any death bene fi t provided during the term of the fi nd these fees: contract. In addition to investment management fees and administration fees, you may  are associated with investment options that include an insurance Insurance-related charges component. They include items such as sales expenses, mortality risk charges and the cost of issuing and administering contracts.  Surrender and transfer charges are fees an insurance company may charge when an employer terminates a contract (in other words, withdraws the plan’s investment) before the term 5

10 of the contract expires or if you withdraw an amount from the contract. This fee may be imposed if these events occur before the expiration of a stated period, and commonly decrease and fi disappear over time. It is similar to an early withdrawal penalty on a bank certi cate of deposit or to a back-end load or redemption fee charged by some mutual funds. Stable value funds. A common investment option that generally includes fi xed income securities and one or more contracts issued by banks or insurance companies that provide protection of contributions fi xed, linked to invested (the principal) and accumulated interest, as well as a rate of return that may be an index, or reset periodically based on the performance of the fund’s investments. These funds may have investment management and other administrative fees associated with their operation. While the investments described above are common, 401(k) plans also may offer other investments which are not described here (such as employer securities). 4. Where can I get information about the fees and expenses charged to my 401(k) plan account? If you have questions about the fees and expenses charged to your 401(k) plan, review the documents noted below or contact your plan administrator. The following information is available from your plan: If you direct the investments in your account, your plan will provide information about your  rights and responsibilities under the plan related to directing your investments. This includes plan and investment-related information, including information about fees and expenses, that you need to make informed decisions about the management of your account. The investment-related information is provided in a format, such as a chart, that allows for comparison among the plan’s investment options. The plan should provide this information before you can direct investments rst time and annually thereafter. You also will receive a statement with information on for the fi fees and expenses for administrative or individual services actually paid from your individual account at least quarterly. This statement does not include charges paid indirectly from the investment options you have chosen. A model chart that is similar to what you may receive is included in the back of this publication. It includes performance data for each investment option over 1, 5 and 10 years; returns of an appropriate broad-based securities market index (referred to as a benchmark) over these same time periods for comparison; and fee and expense information on the costs of running each investment option (expense ratio) and service and shareholder-type fees (such as sales charges). The chart also includes a glossary to help you understand the investment options offered by your plan. To help you use this information, see EBSA’s publication Maximize Your Retirement Savings – . These tips also Tips on Using the Fee and Investment Information From Your Retirement Plan will help you use the periodic fee and investment information from your plan to see if you want to make any changes. 6

11  Your 401(k) plan’s will tell you what the plan provides summary plan description (SPD) and how it operates. It may tell you about the investments offered by your plan, the fees and expenses paid by the plan, and how those expenses are allocated among plan participants. A copy of the SPD is furnished to participants when they join a plan and then every 5 years if there are fi cations or every 10 years if there is no modi fi cation. material modi  contains information regarding the plan’s The plan’s annual report (Form 5500 series) assets, liabilities, income and expenses and shows the aggregate administrative fees and other expenses paid by the plan. However, it will not show expenses deducted from investment results or fees and expenses paid by your individual account. You may examine the annual report for free summary annual report , which summarizes the online at www.efast.dol.gov . In general, the annual report information, is distributed each year. nancial fi You also may request copies of prospectuses or similar documents from your plan as well as statements provided to your plan, and share values for your plan’s investment options (with the valuation date). In addition, you may want to consult the business section of major daily newspapers, business and fi nancial publications, rating services, the business librarian at the public library, or the Internet (see the list of helpful Websites at the back of this booklet). These sources will provide information and help you compare the performance and expenses of your investment options with other investments outside of your 401(k) plan. If, after doing your own analysis, you have questions regarding the rates of returns or fees of your plan’s investment options, ask your plan administrator for an explanation. 5. What other factors might impact the fees and expenses of my 401(k) plan? Funds that are “actively managed” (i.e., funds with an investment adviser who continually  researches, monitors, and actively trades the holdings of the fund to seek a higher return than the market) generally have higher fees. The higher fees are associated with the more active management provided and sales charges from the higher level of trading activity. While actively managed funds seek to provide higher returns than the market, neither active management nor higher fees necessarily guarantee higher returns. Funds that are “passively managed” generally have lower management fees. Passively managed  funds seek to obtain the investment results of an established market index, such as the Standard and Poor’s 500, by duplicating the holdings included in the index. Thus, passively managed funds require little research or trading activity. If the services and investment options under your plan are offered through a bundled program,  then some or all of the costs of plan services may not be separately charged to the plan or to your employer. For example, these costs possibly may be subsidized by the asset-based fees charged on investments. Compare the services received in light of the total fees paid. 7

12 Plans with more total assets may be able to lower fees by using special funds or classes of  stock in funds, which generally are sold to larger group investors. “Retail” or “brand name” funds, which are also marketed to individual and small group investors, tend to be listed in the newspaper daily and typically charge higher fees. Let your employer know your preference. Optional features, such as participant loan programs and insurance bene fi ts offered under variable  annuity contracts, involve additional costs. Consider whether they have value to you. If not, let your employer know. Retirement plans, such as 401(k) plans, are group plans. Therefore, your employer may not be  able to accommodate each employee’s preferences for investment options or additional services. 6. Is there a checklist I can use to review my 401(k) plan’s fees? There is an array of investment options and services offered under today’s 401(k) plans. Answers to the following 10 questions will help in gathering information about the fees and expenses paid by your plan. If you cannot fi nd the answers, ask your plan administrator. 401(k) Fees Checklist 1 What investment options are offered under your company’s 401(k) plan? 2 Do you have all available documentation about the investment options under your plan and the fees charged to your plan? What types of investment education are available under your plan? 3 What arrangement is used to provide services under your plan (i.e., are any or all of the services or 4 investment options provided by a single provider)? 5 Do you and other participants use most or all of the optional services offered under your 401(k) plan, such as a participant loan program and insurance coverage? 6 If administrative services are paid separately from investment management fees, are they paid for by the plan, your employer, or are they shared? Are the investment options tracking an established market index or is there a higher level of 7 investment management services being provided? 8 Do any of the investment options under your plan include sales charges (such as loads or commissions)? 8

13 9 Do any of the investment options under your plan include any fees related to speci c investments, fi such as 12b-1 fees, insurance charges, or surrender fees, and what do they cover? 10 Does your plan offer any special funds or special classes of stock (generally sold to larger group investors)? This booklet is only the beginning of your educational process. You should ask questions and educate yourself about investments. Monitoring your current investment selections and reviewing the investment options offered under your plan are part of a process that you, as an informed participant, will need to undertake continually. Keep in mind that the law requires the fees charged to a 401(k) plan be “reasonable” rather than setting a speci c level of fees that are permissible. Therefore, the reasonableness of fees must be fi determined in each case. In Conclusion ... When you consider the fees in your 401(k) plan and their impact on your retirement income, remember that all services have costs . If your employer has selected a bundled program of services and investments, compare all services received with the total cost . Remember, too, that higher investment management fees do not necessarily mean better performance. Nor is cheaper necessarily better. Compare the net returns relative to the risks among available . investment options And, nally, don’t consider fees in a vacuum . They are only one part of the bigger picture fi including investment risks and returns and the extent and quality of services provided. Keep in mind the importance of diversifying your investments. 7. What other sources of information are available? Listed below are some organizations and their Websites, phone numbers and publications that can help in your research. From the Employee Bene fi ts Security Administration: Maximize Your Retirement Savings – Tips on Using the Fee and Investment Information From Your Retirement Plan Target Date Retirement Funds Investor Bulletin 9

14 What You Should Know About Your Retirement Plan Savings Fitness: A Guide to Your Money and Your Financial Future Taking the Mystery Out of Retirement Planning Website: www.dol.gov/ebsa Toll-free Publication Hotline: 1-866-444-3272 From the Securities and Exchange Commission : Get the Facts on Saving and Investing Invest Wisely - An Introduction to Mutual Funds Ask Questions - Questions You Should Ask About Your Investments Website: www.sec.gov Toll-free phone information service: 1-800-SEC(732)-0330 From the Board of Governors of the Federal Reserve System : Website: www.federalreserve.gov From the Comptroller of the Currency : Website: www.occ.gov Toll-free Hotline: 1-800-613-6743 From the American Savings Education Council (ASEC) : Website: www.choosetosave.org/asec Phone: (202) 659-0670 10

15 From the fi ed Financial Planner Board of Standards : Certi Website: www.cfp.net Toll-free Hotline: 1-800-487-1497 From the Financial Industry Regulatory Authority : Website: www. fi nra.org Phone: (301) 590-6500 11

16 Model Comparative Chart ABC Corporation 401k Retirement Plan Investment Options – January 1, 20XX elp you compare the investment options under your This document includes important information to h about your investment opti ons, you can go to the retirement plan. If you want additional information specific Internet Web site address shown below or yo u can contact [insert name of plan administrator s]. A free paper copy of the information available or designee] at [insert telephone number and addres nsert name of plan administrator or designee] at on the Web site[s] can be obtained by contacting [i [insert telephone number]. Document Summary ormance information for plan investment options. This document has 3 parts. Part I consists of perf This part shows you how well the investments have pe rformed in the past. Part II shows you the fees and expenses you will pay if you invest in an option. Part III contains information about the annuity options under your retirement plan. Part I. Performance Information Table 1 focuses on the performance of investment options that do not have a fixed or stated rate of return. Table 1 shows how these options have perf ormed over time and allows you to compare them with an appropriate benchmark for the same time pe riods. Past performance does not guarantee how the investment option will perform in the future. Yo ur investment in these options could lose money. Information about an option’s principal risks is available on the Web site[s]. Table 1—Variable Return Investments Average Annual Total Return Name/ Benchmark as of 12/31/XX Type of Option 1yr. Since Since 5yr. 1yr. 5yr. 10yr. 10yr. Inception Inception Equity Funds .34% -1.03% 26.5% 9.25% 26.46% .42% -.95% 9.30% A Index Fund/ S&P 500 S&P 500 www. website address 2.77% 27.6% .99% N/A 2.26% N/A 27.80% 1.02% B Fund/ Large Cap US Prime Market 750 Index www. website address 40.40% 5.40% 2.40% 12.09% 9.37% 36.73% 5.26% 2.29% C Fund/ Int’l Stock MSCI EAFE www. website address 4.16% 40.22% 2.28% 6.13% 3.29% 46.29% 2.40% -.52% D Fund/ Mid Cap Russell Midcap www. website address Bond Funds 6.45% 4.43% 6.08% 5.93% 4.97% 6.33% 7.01% 7.08% E Fund/ Bond Index Barclays Cap. Aggr. Bd. www. website address Other 1.8% 3.1% 3.3% 5.75% 5.56% .72% 3.36% 3.11% F Fund/ GICs 3-month US T-Bill Index www. website address 4.99% 4.36% 4.64% 3.3% 5.07% 3.75% 3.1% 1.8% G Fund/ Stable Value 3-month US T-Bill Index www. website address 3.09% 26.46% N/A N/A 27.94% N/A N/A 2.45% Generations 2020/ S&P 500 Lifecycle Fund www. website address 23.95% N/A N/A 3.74% Generations 2020 Composite Index* 13

17 *Generations 2020 composite index is a combination of a total market index and a US aggregate bond index proportional to the equity/bond al location in the Generations 2020 Fund. focuses on the performance of investment options that have a fixed or stated rate of return. Table 2 option, the term or length of time that you will Table 2 shows the annual rate of return of each such earn this rate of return, and other information relevant to performance. Table 2—Fixed Return Investments Name/ Return Term Other Type of Option H 200X/ GIC 2 Yr. The rate of return does not change during the stated 4% www. website term. address I LIBOR Plus/ Fixed- The rate of return on 12/31/xx was 2.45%. This rate is Quarterly LIBOR +2% fixed quarterly, but will never fall below a guaranteed Type Investment Account minimum rate of 2%. Current rate of return information is available on the option’s Web site or at www. website 1-800-yyy-zzzz. address J Financial Services 12/31/xx was 3.75%. This rate of The rate of return on 3.75% 6 Mos. return is fixed for six months. Current rate of return Co./ Fixed Account Investment information is available on the option’s Web site or at www. website 1-800-yyy-zzzz. address Part II. Fee and Expense Information Table 3 shows fee and expense information for the investment options listed in Table 1 and Table 2. Table 3 shows the Total Annual Operating Expenses of the options in Table 1. Total Annual Operating Expenses are expenses that reduce the rate of re turn of the investment option. Table 3 also shows Shareholder-type Fees. These fees are in addition to Total Annual Operating Expenses. Table 3—Fees and Expenses Total Annual Name / Operating Shareholder-Type Fees Type of Option Expenses Per As a % $1000 Equity Funds A Index Fund/ $20 annual service charge su btracted from investments 0.18% $1.80 held in this option if valued at less than $10,000. S&P 500 2.25% deferred sales charge subtracted from amounts B Fund/ $24.50 2.45% withdrawn within 12 months of purchase. Large Cap from amounts invested. C Fund/ International 5.75% sales charge subtracted 0.79% $7.90 Stock 4.25% sales charge subtracted from amounts withdrawn. D Fund/ 0.20% $2.00 Mid Cap ETF Bond Funds E Fund/ N/A 0.50% $5.00 Bond Index Other F Fund/ 10% charge subtracted from amounts withdrawn within 0.46% $4.60 GICs 18 months of initial investment. G Fund/ Amounts withdrawn may not be transferred to a 0.65% $6.50 competing option for 90 days after withdrawal. Stable Value 14

18 Generations 2020/ Excessive trading restricts additional purchases (other 1.50% $15.00 than contributions and loan repayments) for 85 days. Lifecycle Fund Fixed Return Investments N/A H 200X / GIC 12% charge subtracted from amounts withdrawn before maturity. I LIBOR Plus/ Fixed- 5% contingent deferred sales charge subtracted from reduced by 1% on 12-month N/A amounts withdrawn; charge Type Invest Account anniversary of each investment. J Financial Serv Co. / N/A 90 days of interest subtracted from amounts withdrawn Fixed Account before maturity. Investment The cumulative effect of fees and expenses can substantially reduce the growth of your retirement savings. Visit the Department of Labor’s Web site for an example showing the long-term effect of fees ications/401k_employee.html . Fees and expenses are and expenses at http://www.dol.gov/ebsa/publ only one of many factors to consider when you decide to invest in an option. You may also want to tion, along with your other investments, will help think about whether an investment in a particular op you achieve your financial goals. Part III. Annuity Information . Annuities are insura nce contracts that allow Table 4 focuses on the annuity options under the plan you to receive a guaranteed stream of payments at regular intervals, usually beginning when you retire issued by insurance companies. Guarantees of an and lasting for your entire life. Annuities are insurance company are subject to its long-term financial strength and claims-paying ability. Table 4—Annuity Options Name Objectives / Goals Pricing Factors Restrictions / Fees Payment amounts are based The cost of each share To provide a guaranteed Lifetime Income on your life expectancy only depends on your age and stream of income for Option and would be reduced if your life, based on shares interest rates when you you choose a spousal joint you acquire while you www. website buy it. Ordinarily the and survivor benefit. work. At age 65, you will address closer you are to receive monthly retirement, the more it will You will pay a 25% payments of $10 for each cost you to buy a share. surrender charge for any share you own, for your amount you withdraw The cost includes a life. For example, if you before annuity payments guaranteed death benefit own 30 shares at age 65, begin. payable to a spouse or you will receive $300 per beneficiary if you die month over your life. If your income payments before payments begin. are less than $50 per The death benefit is the month, the option’s issuer total amount of your may combine payments and contributions, less any pay you less frequently, or withdrawals. return to you the larger of your net contributions or the cash-out value of your income shares. Generations To provide a guaranteed You have the right to elect Maximum surrender charge 2020 Variable stream of income for fixed annuity payments in of 8% of account balance. the form of a life annuity, a Annuity Option your life, or some other joint and survivor annuity, Maximum transfer fee of period of time, based on 15

19 $30 for each transfer over or a life annuity with a your account balance in the Generations 2020 12 in a year. term certain, but the payment amounts will vary Lifecycle Fund. www. website address based on the benefit you Annual service charge of This option is available choose. The cost of this $50 for account balances through a variable below $100,000. right is included in the Total Annual Operating annuity contract that Expenses of the your plan has with ABC Insurance Company. Generations 2020 Lifecycle Fund, listed in Table 3 above. The cost also includes a guaranteed death benefit payable to a spouse or beneficiary if you die before payments begin. The death benefit is the greater of your account balance or contributions, less any withdrawals. Please visit www.ABCPlanglossary.com for a glossary of investment terms relevant to the investment tended to help you better understand your options. options under this plan. This glossary is in 16

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