AHRP Home Page > October 2007

October 2007

AHRP Beneficiary Online

Ben E. Fitz The AHRP Web site now offers the opportunity to register, review, and modify your AHRP beneficiary(ies) online. (Your beneficiary is the recipient of your AHRP balance following your death).

AHRP has traditionally utilized a Beneficiary Designation Form (BDF) to obtain a participant’s primary and contingent beneficiaries. Completed forms are returned to the AHRP Retirement Center, optically scanned and maintained as part of the participant’s file for future reference. However, information contained on the scanned BDF is not available through the AHRP Web site and participants wishing to review this information are required to call the AHRP Retirement Center and s peak with a representative who can access the information.

The preferred means of registering your beneficiary(ies) will now be through the AHRP Web site. Beneficiary Designation Forms will still be available upon request for those who do not wish to use the AHRP Web site.

As you access your account through the AHRP Web site, you will now be prompted to register your beneficiary(ies) online through an “action needed” prompt even if you have previously registered your beneficiary(ies) using the BDF. This modification allows participants to more conveniently register, review and modify their beneficiary designation(s).

The AHRP will utilize your most recent beneficiary(ies) designation, whether that be through registration on the AHRP Web site or through use of a BDF.

Also In This Issue:

Fidelity Freedom Funds as Default Investment Elections
Pre-Tax vs. Roth: Which is Better?

When your work speaks for itself, don't interrupt. —Henry J. Kaiser

This newsletter is general information only. It does not cover plan provisions in detail. Official legal plan documents always govern the plan.

Fidelity Freedom Funds as Default Investment Elections

Beginning January 1, 2008, the age appropriate Fidelity Freedom Fund will be used as the default investment election for participants who have not indicated how they wish to invest funds placed in their AHRP account.

The Freedom Funds replace the AHRP Capital Preservation Account which has been used as the default investment election since 1992. The AHRP Capital Preservation Account is a stable value option which offers a 5.25% rate of return for 2007. For individuals with many years before retirement, the AHRP Capital Preservation Account is very likely too conservative and will not provide adequate long term growth to meet retirement needs.

Each Freedom Fund is a combination of Fidelity equity, fixed-income and money market mutual funds using a moderate asset allocation strategy designed for investors expecting to retire around the year included in the fund’s name. As time progresses, the Fidelity managers continually rebalance and reallocate the asset mix to reduce investment risk as the participant nears retirement The table below illustrates a reduced exposure to stock investments and an increased exposure to bonds and cash as individuals near their (approximate) target retirement date.

Fidelity Freedom Funds
Percent Allocation by Asset Class (6/30/07)

	FF 2050	FF 2040	FF 2030	FF 2020	FF 2010	FF Income
Stocks: International	24.6%	21.7%	20.9%	17.7%	13.5%	1.8%
Stocks: Domestic	64.3%	62.7%	60.8%	51.7%	39.2%	20.1%
Bonds	8.5%	12.6%	15.0%	25.8%	36.1%	47.6%
Cash/Cash Equiv.	2.6%	3.0%	3.3%	4.8%	11.2%	30.5%
TOTAL	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

The adoption of Fidelity Freedom Funds as investment defaults will assure that participants who are inattentive to their retirement savings account will have a more appropriately diversified asset allocation thereby enhancing their likelihood of financial security during retirement.

[Go Back to Also in this Issue]

PRE-TAX vs. ROTH: Which is Better?

The July 2007 edition of the Future $umTimes announced that a Roth 403(b) savings alternative would become available through the AHRP beginning January 1, 2008. An obvious question: “How can I determine whether a Traditional 403(b) Plan or a Roth 403(b) Plan is the better alternative for my retirement savings?” This question is impossible to answer with certainty, but by understanding the nature of these alternatives, some assumptions can be made.

The primary difference between a Traditional 403(b) Plan and a Roth 403(b) plan is the timing of federal and state income tax payments on these savings as illustrated in the table below.

	CONTRIBUTIONS	DISTRIBUTIONS
TRADITIONAL 403(b) PLAN	Pre-tax (not subject to federal or state income tax withholding)	Principal and related earnings taxed at ordinary income tax rates in the year of distribution
ROTH 403(b) PLAN	After-tax (subject to federal and state income tax at the time of contribution)	Qualified Distributions of principal and related earnings are free of Income tax

The objective of utilizing a Traditional 403(b) plan is to reduce taxable income in the year the contribution is made thereby deferring income tax on these contributions and their related earnings until retirement when income and corresponding income taxes may be lower.

The objective of utilizing a Roth 403(b) plan is to pay income tax on retirement savings at the current income tax rates thereby avoiding tax liability on these contributions and related earnings upon distribution in the future when income tax rates may be higher.

Who will likely benefit from Roth savings?	Who will likely benefit from pre-tax savings?
Participants paying low marginal income tax rates	Participants paying high marginal income tax rates
Participants who are “very” well prepared for retirement	Participants who aren’t particularly well prepared for retirement
Participants looking for tax diversification	Participants with temporarily high incomes

Whether pre-tax or Roth contributions ultimately offer a better result depends on the relationship between current tax rates and tax rates in retirement. Higher tax rates in retirement favor Roth; lower tax rates in retirement favor pre-tax. If a participant expects to be in the same tax bracket in retirement, the alternatives are theoretically equivalent. However, he/she may prefer Roth savings as a hedge against a possible tax rate increase in retirement (since the tax code is not etched in stone). What is fundamentally unknown until retirement is whether choosing a pre-tax or Roth contribution during one’s working years is the more financially advantageous strategy.