FIN 422 Week 5 A Complete Retirement Plan Example

Ridgeline Design's Retirement Program, Start to Finish: Plan Design, Investment Menu, Fees, Employee Communication, the Partners' Path to a Cash Balance Plan and the Annual Review

[Student Name]

University of Phoenix

FIN/422: Retirement and Benefit Planning

Week 5 Assignment

[Instructor Name]

[Date]

Ridgeline Design, its people and all figures are composites written for a model paper; plan rules and research findings come from the sources listed, are stated generally and change over time.

The composite Denver design firm, two partners and 24 employees, will launch its plan on January 1. Over the past month, the partners estimated retirement needs, chose a safe harbor 401(k), set eligibility and vesting within federal rules, priced contributions and credits and worked through Social Security and distribution planning with a senior employee. A plan that looks good on paper still depends on the funds employees end up in, the fees they pay and whether they understand what is happening to their pay. This paper presents the full program.

Goals of the Program

The program has four goals: help employees replace about 78 percent of pre-retirement income when combined with Social Security, attract and keep skilled designers, let the partners save substantially in the years before they retire and meet every fiduciary and legal duty at reasonable cost.

Plan Design Summary

The core is a safe harbor 401(k) whose employer match, dollar for dollar on deferrals up to 4 percent of pay, vests at once. Deferrals open two months after hire and matching six months after hire, with long-term part-time employees included as the law requires. New employees are automatically enrolled at 4 percent, rising one point each year to 10 percent, with the right to change or opt out. A 3 percent profit-sharing contribution for all eligible employees vests 25 percent a year. Both pre-tax and Roth deferrals are allowed, as are hardship withdrawals and one loan at a time.

The Investment Menu

The default for anyone who does not choose is a target-date index fund series, meeting federal rules for a qualified default investment. Benartzi and Thaler (2001) found that many participants spread contributions evenly across whatever funds are offered, so the share of stocks they hold depends on how many stock funds are on the menu. A short, balanced menu reduces that problem. Beyond the target-date series, the menu offers five index funds: U.S. total stock market, international stocks, U.S. bonds, inflation-protected bonds and a stable value fund. No actively managed funds are included in the first year.

Fees

Fees are stated in dollars as well as percentages. The target-date index series charges about 0.10 percent a year and the core index funds 0.03 to 0.10 percent. Recordkeeping costs a flat $4,500 a year paid by the firm in the first three years, covered by the startup credit, and then shared by participants as a flat per-account fee of about $60. On a $50,000 balance, total annual cost is about $110, compared with $500 or more in many small plans with expensive funds.

Helping Employees Act

Automatic enrollment and escalation do most of the work, following the evidence from Thaler and Benartzi (2004) that committing in advance to future increases, timed with raises, raised average saving rates sharply without reducing take-home pay. Each employee will receive a one-page summary in plain language, a 30-minute meeting with the adviser during the first month and a personalized estimate of retirement income at their current rate. Employees within ten years of retirement will be offered an individual session like the one held with the senior drafter.

What the Plan Can Do

Take the representative designer from Week 1, age 35 and paid $72,000. If she stays enrolled, with contributions rising from 4 to 10 percent over six years plus the 4 percent match and 3 percent profit sharing, total contributions reach 17 percent of pay. Assuming 2 percent real salary growth and a 4.5 percent real return, the account would reach roughly $1 million in today's dollars at 67, well above the roughly $530,000 Week 1 estimated as needed. Even if the designer stayed at 4 percent, the account would reach about $700,000, still above the target. For each partner, deferrals, catch-up, match and profit sharing of $48,500 a year for 13 years at a 4.5 percent real return would build about $830,000, within the 2025 limits (Internal Revenue Service, 2024).

The Path to a Cash Balance Plan

Once the firm's cash flow is predictable, the partners can add a cash balance plan, which would allow each of them to contribute well over $100,000 a year at their ages, with modest pay credits for staff. Adding it would require an actuary, annual funding and coordination with the 401(k)'s testing. The partners set a decision point after two years of results.

The Annual Review

Each January, the partners and adviser will meet as a plan committee. The agenda covers investment performance against benchmarks, fees compared with similar plans, participation and deferral rates, any employees not receiving the full match, compliance deadlines, the next year's limits and any legal changes. Minutes will document each decision, since a prudent process is the core of fiduciary protection.

Coordinating With Social Security and Distributions

The program also prepares employees for the end of their careers, not only the start. As the senior drafter's case showed, decisions about when to claim Social Security and how to withdraw savings can add or subtract tens of thousands of dollars. The plan therefore allows partial withdrawals and installment payments after separation rather than only lump sums, keeps the age-55 separation rule available and offers rollovers into the plan from earlier employers' accounts so that older employees can consolidate savings in low-cost funds. Employees within five years of retirement will receive a written projection showing income at different claiming ages, prepared by the adviser at no cost to them.

Leakage and Loans

A plan can lose value through leakage: loans not repaid when employees leave, hardship withdrawals and cash-outs of small balances by departing staff. The plan limits employees to one loan at a time, requires repayment by payroll deduction and encourages departing employees to roll balances into an IRA or a new employer's plan rather than cash out. The committee will report each year on how much left the plan through loans and cash-outs.

Risks to Watch

Low participation by younger staff, loans that reduce balances and early withdrawals by employees who leave could weaken outcomes. The committee will track these each year and adjust communication.

Conclusion

Ridgeline's program combines a safe harbor 401(k) with automatic enrollment and escalation, a short, low-cost index menu, clear communication, a 3 percent profit-sharing contribution and a dated path to a cash balance plan. Projections show it can meet employees' retirement needs and the partners' goals, and an annual review keeps the plan prudent as rules and people change.

References

Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined contribution saving plans. American Economic Review, 91(1), 79-98. https://doi.org/10.1257/aer.91.1.79

Internal Revenue Service. (2024). 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000 (IR-2024-285). https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

Thaler, R. H., & Benartzi, S. (2004). Save More Tomorrow: Using behavioral economics to increase employee saving. Journal of Political Economy, 112(S1), S164-S187. https://doi.org/10.1086/380085