Category Archives: James Lange

Can Your Employees Hold You Responsible for the Performance of Their 401(k)?

By James Lange

James LangeA Supreme Court ruling in 2015 has given employers who offer retirement plans to their employees an enormous wake-up call. The employees at a California utility company successfully sued the firm over the cost of participating in their 401(k) plan. The court unanimously ruled that the company failed to meet its legal obligation to do what was in the best interest of its employees because the retirement plans that they made available to their workers charged fees that were significantly higher than average. Since then, employers in manufacturing, retail, communications, financial, and others have been named in a flood of new lawsuits from employees emboldened by the success of the plaintiffs in California. One paid $62 million to settle out of court and another followed by offering their employees $57 million to drop their case. Recently the spotlight shifted to the non-profit sector as several prominent universities became the latest targets of lawsuits alleging that for years employers have turned a blind eye and allowed their workers to be charged excessive fees for retirement plan contributions.

Plans that charge high administration fees are particularly egregious when the underlying mutual fund investment fees and management fees are also excessive. Even worse, if there is no true advice for the employee an employer can be scrutinized even further. Did someone sit down with each employee, describe the options, and help them decide on an induvial investment plan? Often, that answer is no. Many times, young workers are invested too conservatively. Other times, older workers make the mistake of “putting all their eggs in one basket.” They make this mistake most often by being over-weighted in large U.S. growth companies and underweighted in small, value, and foreign It is a good practice to periodically review the terms of your retirement plan and do comparisons. Click To Tweet

Hidden Fees Undo Retirement Plan Gains: As an employer, you have an obligation under ERISA to prudently select and monitor the provisions of your employees’ retirement plan. If you haven’t reviewed your plan recently, then this ruling by the Supreme Court should provide you with an incentive to do so. The first step is to know exactly what fees the provider of your retirement plan charges.

Whether you are evaluating your current plan or choosing a new one, consider these issues:

  • Ask about all investment fees. These are by far the largest expense associated with a retirement plan, and they may not even be apparent to you because they are generally deducted directly from investment returns. You might think you’re doing well because your monthly statement shows a $500 gain, but would probably feel differently if you discovered that your investment really earned $600 and fees amounting to $100 were deducted before the remainder was credited to your account! Here’s a tip: Make low-cost index funds available in your plan. Index funds strive to match rather than out-perform the market, and the savings that can result from this “hands-off” approach often result in lower costs for the plan participants who use them. Offering low-cost index funds will significantly lower your own liability and will likely be doing a huge favor to your employees. Getting the appropriate asset allocation with the low-cost index funds is the homerun for both administrators of 401(k) plans as well as most people’s retirement plans.
  • Keep administration costs as low as possible. These fees pay for the expenses of maintaining the plan. At a minimum, this includes accounting, legal services, and filing the appropriate paperwork with the IRS. Optional, and for extra cost, are services such as professional investment and retirement planning advice, daily valuations, online access to accounts, etc. Generally, the fewer bells and whistles associated with the plan you offer to your employees, the lower the administration fees will be. The balance between benefits and cost is critical.
  • Beware of individual service fees. They may not affect every employee, so many employers view them as a cost voluntarily assumed only by the individuals who choose to take advantage of the service. An example of this would be a fee charged to an employee who wants to take a loan out against his 401(k) plan. But, they also include fees charged to everyone for allocating their bi-weekly contributions in to the accounts. The definition of service fees can vary greatly, so it is important to know how your plan assesses them and to make sure your employees understand them.

In 2016, the Security and Exchange Commission’s Investor Advisory Committee (IOC) recommended that the SEC take steps to ensure that consumers understand exactly how much they pay in fees, and to show how those fees affect their investment return. If the SEC approves their recommendation, companies will be required to disclose their fees in terms of dollars instead of expressing them as a percentage. Your employees may be in for a shock when they find out how much it costs to participate in your retirement plan.

It is a good practice to periodically review the terms of your retirement plan and do comparisons. With constantly changing tax laws, you may find a different type of plan that results greater benefits for your business, and your employees. At a minimum, you will be sure that the costs associated with the plan you offer are reasonable and well understood.

Instead of filing lawsuits, your employees will thank you for looking out for their best interests and protecting their nest egg.

James Lange is a CPA/Attorney whose specialty is Estate Planning for clients with significant IRAs and retirement plans. He is the best-selling author of Retire Secure! and The Little Black Book of Social Security Secrets. His newest book is available on his website and Amazon: The Ultimate Retirement and Estate Plan for Your Million Dollar IRA. You can sign up for Jim’s books for free at

New Rules Will Increase Tax Burden on Inherited Retirement Plans

By James Lange

James LangeSally, a successful small business owner, knows how to stretch a dollar. Her clients and four employees value her financial acumen, and she brings the same keen discretion to her personal finances. Thirty years ago, Sally inherited what was left in her father’s IRA and by limiting her withdrawals to the minimum required distributions (MRD) she has been “stretching” his legacy ever since—it’s nice to have a cushion for unexpected expenses. She wants to give her son, a budding entrepreneur, the same advantages, but Congress is threatening to curtail the stretch to five years—a move that will deliver a massive tax blow to inherited IRA owners, and a tax bonanza for the government.

How would you protect your legacy? First, the basic tax rules pertaining to retirement plans and IRAs:

  • You are not required to pay taxes on the earnings until you withdraw money from the account. The ability to defer taxes is a powerful wealth-building tool.
  • At age 70 ½, you must begin taking MRDs and pay taxes on the amount that you withdraw. If you leave your IRA directly to your spouse, he/she can continue to defer income taxes as well.
  • A non-spouse beneficiary must pay taxes on distributions, but by taking only minimum required distributions your heirs can stretch your IRA for a long time—the difference could mean hundreds of thousands, or even millions of dollars to them over the course of their lifetimes.

Unfortunately, since 2012, Congress has attempted to pass legislation that changes the IRA distribution rules. And when they succeed in getting their way, your children and grandchildren will pay the price. The good news is that there are work-arounds for the strict rules that will go into effect once the legislation does pass.How would you protect your legacy? Click To Tweet

  • Consider Roth IRA conversions and avoid massive and accelerated taxation on inherited IRAs by reducing the amount of assets held in traditional IRAs altogether. Roth IRAs grow and are distributed tax-free. Parents who convert their IRAs into Roth IRAs limit the amount of taxable funds that are passed on to their children. A child who inherits a $1 million Roth will still have to take MRDs and if the law passes, liquidate the Roth within five years of the death of their parent. However, the taxes are already paid on the Roth, so there will be no income tax bill to contend with.
  • You can set up a Charitable Remainder Unitrust (or CRUT) and name it as the beneficiary (if you are single) or contingent beneficiary (if you are married) of your IRA. When you die, all of the money goes in to the trust, and is not taxed until it is withdrawn. You can designate an income beneficiary, generally your child or children, who would get an income of at least five percent from the trust for the rest their lives. The distributions are taxable, but will be spread out over a greater length of time than five years. Depending on your child’s tax bracket, the distributions are often taxed at a lower rate than if the entire IRA had to be taxed over five years. When your child dies, or the trust is terminated, the remaining assets are distributed to charity. There are no taxes on your IRA at the time of your death, because the ultimate beneficiary is a charity. And your estate can take a tax deduction in the year that your IRA is transferred to the trust! In many scenarios, if the child lives beyond age 72, he will be better off than if you had left him the money outright. One caveat, this strategy should not be implemented until the new law passes.
  • A Survivorship life insurance policy is another way to make up for the accelerated taxation on the IRA. This type of policy is taken out on two people (usually a married couple) and provides benefits to their heirs after the second spouse dies. In many instances, it makes sense to pay for the insurance by withdrawing money from the IRA. This decreases its value, which reduces both estate and income tax liabilities. And the death benefit of the life insurance is paid to your beneficiaries tax-free! This strategy works well even if the proposed law doesn’t pass and can be worth millions of extra dollars to the children if the proposed law does pass.

For many people, their IRAs or retirement assets make up the bulk of their wealth. It really doesn’t seem fair to force accelerated tax payments on your heirs, and significantly reduce the size of their inheritance over the long term. But if you are not paying attention, your heirs could end up paying taxes early. Life insurance, Roth IRAs, and CRUTS, or preferably some combination of them, can significantly add to your legacy. Take a lesson from Sally and consult with your financial advisor to review your options and take steps to protect the next generation.

James Lange is a CPA/Attorney whose specialty is Estate Planning for clients with significant IRAs and retirement plans. He is the best-selling author of Retire Secure! and recently published The Little Black Book of Social Security Secrets. You can sign up for Jim’s books for free at:

American Women are More Likely to Suffer Financially in Retirement than Men

By James Lange

James LangeRecent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are. Approximately 8 percent of adults aged 65 and older must rely on food stamps to survive and, of those, two-thirds are women. Why is there such a financial inequity between men and women in their golden years?

In years past, women typically earned much less than men (fortunately, this has started to change). Because they earned less than men, women were not able to save as much for retirement. Federal law establishes the maximum percentages that workers can contribute to retirement plans.

Assuming that two workers both contribute the maximum percentage to their retirement plans, a male worker who earns $60,000 will save more dollars than a female worker who earns $40,000. Women must also make what they can save last longer. According to the Social Security Administration, the life expectancy of a man who is 65 today is 84.3. The life expectancy of a female, who is 65 today, is 86.6—a difference of almost two and one-half years.

Many women who are now retired are not as educated about finances as women of subsequent generations. They let their husbands manage the money, and frequently are unintended victims of poor decisions made by their spouses. This is especially true when considering both defined benefit pensions and Social Security elections.

Retirees generally have the choice of applying for a higher benefit that lasts for their own lifetime, or a reduced benefit that is paid over the course of both their and their surviving spouse’s lifetimes. Many insist on applying for the higher benefit under the premise that they need a higher income to live on. If they are the first to die, though, their spouses are cut off completely. Many of the primary wage earners also make bad decisions when applying for Social Security benefits, never considering how their actions will affect their spouses. The decisions they make can mean a difference of about $25,000 in Social Security income every year, for their surviving spouses.

The good news is that, even if you are retired now, there are steps that you can take to improve your outlook in retirement. Consider some of these options:

  • If you are saving for retirement, take advantage of qualified retirement plans such as 401(k)s, 403(b)s, and IRAs. These plans offer tax advantages that, in the long run, will provide you with a much larger nest egg in retirement than buying identical investments inside a non-retirement account. Make sure that you manage the money that you do save, well. Many women are afraid to invest their money in anything other than CD’s, and never consider that the low rates of return they offer may cause them to run out of money before they run out of time.
  • If your spouse is entitled to a defined benefit pension when he retires, or if he will receive payments from an annuity, make sure that he chooses the payment option that covers your life as well as his own – especially if you are younger than he is. If he chooses the option that covers only his life, the payments will stop when he dies. If you can’t afford to live on the reduced benefit amount that covers both of your lives, then you can’t afford to stop working.
  • If your spouse earned more money than you did, ask him to think twice about applying for Social Security benefits at age 62. If he does, his benefit will be reduced by 25 percent for the rest of his life. Your spousal benefit, as well as your survivor benefit if he predeceases you, will also be permanently reduced. If it’s possible, encourage your spouse to wait until age 70 to apply for benefits. If he does, his benefit will be increased by 32 percent. If you survive him, the benefit you receive after his death will also be significantly higher.
  • Many women are not educated about financial and tax strategies they can use to make their money last longer. Consider making a series of Roth IRA conversions during the years after you retire, but before you start taking withdrawals or Required Minimum Distributions from your retirement plans. The money you save in a Roth IRA is not taxable, and so lasts longer than money that is in a traditional retirement plan.
  • If you can afford it, consider purchasing Long Term Care insurance. The cost of care, whether it be in your home or in a licensed facility, is far greater than many retirees anticipate. More than 70 percent of nursing home residents are women. Many must spend all of their assets in order to pay for their own care and, at their deaths, have nothing to leave to their children.

It is important to remember that there is no one-size-fits-all answer to this problem. In order to make sure that you are financially secure, it is imperative that you contact a financial professional that you can trust and discuss these points in detail. A good fee-based advisor will be able to guide you through the best possible choices for pensions, Social Security, investment planning, and long-term care expenses.

James Lange is a CPA and Attorney who specializes in the field of Estate Planning. He is the best-selling author of “Retire Secure!” and “The Roth Revolution.” Jim teaches common sense, easy to understand strategies to help make your money last longer. For a free copy of his most recent book, “The Little Black Book of Social Security Secrets,” visit his website at