Fighting your lame office retirement plan
With lots of individual options out there, you don’t have to let bad benefits ruin your retirement.
One year ago, consumers woke up and found that hackers had one heck of a field day with their Social Security numbers and other information in a massive data breach at Equifax.
Equifax’s screw-up would forever leave millions that much more vulnerable to ID theft. Face it, it’s not like you can change the locks on the side door. Once hacked, your Social Security number is out there indefinitely.
But beginning Sept. 21, a new federal law will help consumers stop intruders in their tracks. The three big credit reporting agencies — Equifax, Experian and TransUnion — will be required to offer you a credit freeze, free. Such a freeze will restrict access to your credit file and help stop crooks from opening credit cards in your name.
Also starting Sept. 21, parents across the U.S. will be able to get a free credit freeze for children under age 16. A child’s credit file would be frozen until the child is old enough to use credit.
The new law is a key step for regaining some control over our data. But there’s a not-so-small challenge ahead: Many have no idea what a credit freeze is and how it works, according to new research by a team at the University of Michigan School of Information in Ann Arbor.
Amazingly, some consumers wrongly think that a credit freeze stops them from using their own credit cards.
So what exactly is a credit freeze? A credit freeze stops many but not all businesses and others from reviewing your credit file. The consumer who signs up for a voluntary credit freeze is given a PIN — that you want to keep track of — to use if you want to unfreeze that credit file to apply for new credit.
Under the new law, if a consumer asks for a freeze online or by phone, the credit reporting agency has to put the freeze in place no later than the next business day, according to a Federal Trade Commission blog. If the consumer wants to lift the freeze — for example, to finance a new phone or fridge — that has to happen within an hour.
“It’s just assumed that people know what a credit freeze is,” said Florian Schaub, a University of Michigan assistant professor of information, whose research focuses on security and privacy issues. But Schaub, 35, said too often “credit freeze” is just swept into the jargon in the industry — jargon that many consumers do not understand. Many times, people only fully understand a credit freeze once they’re victims of ID theft and told that a credit freeze is essential.
Some consumers had a hard time understanding the term “fraud alert” as well. Some thought the alerts were when a bank or credit union would text you when fraudulent activity was detected on your account.
Instead, placing a fraud alert on your credit file actually means you’re adding a red flag, if you will, to your credit report to alert a lender to verify your identity before making a loan. Under the new law, a fraud alert will last a year, instead of 90 days. If a victim of identity theft, you’d still be able to extend a fraud alert for seven years.
But all that jargon — freezes, locks, alerts — can confuse consumers who are already overwhelmed in their financial lives.
Schaub said the credit bureaus don’t have much incentive to carefully explain things like credit freezes or fraud alerts. After all, their business model is to collect and aggregate our information to provide to lenders who want to sell us loans.
“We, as citizens, are not their customers,” he said. “What makes them money is sharing our credit reports with other businesses.”
As average 401(k) balances reach record highs, how does yours measure up?
For those working in small businesses, chances are the news isn’t great. Big companies typically are the ones with the most investment choices, the lowest fees and the richest match.
A congressional bill and a recent White House directive aim to give a leg up to smaller plans by making it easier for them to band together, command better pricing and ease administrative burdens. The measures would make other changes, including altering the rules around required minimum distributions to reflect longer life expectancies.
While the RMD reprieve will likely get universal approval from wealthier retirees who would rather not pay taxes on distributions they don’t actually yet need, the idea for smaller retirement plans has some significant caveats.
It would smooth the way for unrelated groups of companies to form a single 401(k) plan. Currently, among other obstacles, these employers would face disqualification of their plans if one member of the group is found to be violating compliance rules.
But jumping into a pool with other employers raises a host of questions about who is ultimately responsible for making sure the plan is working in employees’ best interest, notes Allison Brecher, general counsel for Vestwell, a new platform that provides 401(k) services. The company contends that technology is already stripping significant costs out of plan design and maintenance, without the need for bundling participants.
Policing the plans is a valid concern, but Alicia Munnell, director of the Center for Retirement Research at Boston College, is skeptical that many small businesses will even get that far.
“We’ve done a lot to make cheap plans for small businesses, and the needle hasn’t moved. A lot of these firms are just so focused on getting up and running, and their workers are saying they just need cash,” making it very difficult to get plans started, she said.
She does think the current plans’ backing by the financial services industry could help carry the ideas further than previous proposals, including an Obama administration program to encourage savings through Treasury bonds (now scrapped).
But you don’t have to wait for any of these ideas to come to pass.
If you’re a small business owner, look into whether a SIMPLE-IRA, a Simplified Employee Pension Plan (SEP-IRA) or a self-employed 401(k) plan might work for your situation.
If you work for a company without a retirement plan, open a Roth IRA or a traditional IRA. They have lower contribution limits than workplace plans, but it’s a start. Just be aware you’ll need to save more in taxable accounts to make up the difference.
How much to save if money is particularly tight? Borrow a page from big employer plans by starting with a small percentage of pay and ramping that up each year or each time your pay increases.
The big advantage large plans have over small ones — other than a company match — is their ability to automatically escalate contributions, making savers barely notice they are putting away more each year. Replicate that small piece, and you’re on your way.