Pension Protection Act of 2006

Last August, The Pension Protection Act of 2006 was passed, providing many benefits to savers. It was created with an eye on helping to “Protect pension and retirement plan participants and promote individual savings.” In a nutshell [don't worry, we won’t dive into the entire 1,304-page Act today], we’ll focus on five of the prominent areas in the plan …

1. Permanency to retirement plan and savings incentives. Contribution limits to IRAs, 401(k)s, and other workplace savings plans were increased in 2001 but were due to expire in 2010. This legislation makes these increases permanent. It also makes permanent the relatively new Roth 401(k) option which was slow to catch on for fear it would also disappear in 2010.

2. Automatic 401(k) enrollment. The new plan makes it easier for corporations to set up automatic enrollment in 401(k) plans. They can also set the plans to increase contributions automatically over time. I think this is great. If you don’t, you can ‘opt out’ – the issue now is that you may need to opt out of your company plan rather than opting in. In a study of four large companies that made 401(k) enrollment automatic, researchers found that 96% of employees were saving in a 401(k) plan six months after being hired [compared with 43% that were saving after six months prior to the switch to automatic enrollment]. According to the Employee Benefit Research Institute, it is expected that automatic enrollment would increase 401(k) participation from about 66% (currently) of eligible workers to more than 90%. Employers will be able to start contributions at 3% of salary and increase it over time to 6%. “Lifecycle” or “Target Retirement” funds are likely to be the default fund.

3. Deposit your tax refund automatically into an IRA. Starting in 2007, you can directly deposit all or a portion of your federal tax refund into an IRA. Consider this – the average tax refund of $2,400 is more money than the average person now saves for retirement annually!

4. Other IRA Enhancements. Beginning in 2010, it will be possible for anyone to convert eligible workplace savings plans or traditional IRA assets into a Roth IRA [regardless of income]. There are many other enhancements [primarily estate planning-related] which you can read more about below.

5. 529 College Savings Plan benefits are now permanent. The benefits of this college savings tool, established in 1996, were set to expire in 2010. This uncertainty kept many potential parents on the sidelines or in other vehicles because of their uncertain future.

ADDITIONAL RESOURCES.
- White House Pension Act Fact Sheet
- Fidelity Investments
- TIAA-CREF – Pension Protection Act of 2006 Guide


*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director

8% Rule ...

In an interview earlier this week, I was asked the question of what financial pitfalls most befall college students. I’ve come to the conclusion that I am much more concerned about pride (why students don't come to seek financial assistance than why they do come). Aside from pride, the biggest financial problem I’ve witnessed is student loans. There are a lot of potential factors here: overspending, no budget, borrowing more than can afford to be repaid, having a ‘head in the sand’ approach and not really having a clue about what they owe or anything else about their financial situation, and increasing educational costs, just to name a few.

I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.

Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing. Read more about early results of their Path program.

SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.

- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center

The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director