AARP Bulletin - January/February 2009

; Ask the Experts
The Law ; Your AARP

By Emily Sachar

QI’ve been hearing that trying to “time the market” doesn’t work and that if I miss out on a few good days when the market is up, I could miss out on gaining back my portfolio’s value. Is this true?

AYes. According to a study by SEI Invest-
ments, a wealth man-
agement company, investors who cashed out when the
market was down, then waited until the market “recov-
ered” to get back in, lost out on double-digit gains. But
investors who held onto investments through the last 12
bear markets gained an average of 32. 5 percent in the year
following the market’s recovery.

The bottom line: Don’t try to time the market. Investment returns are generally made in just a few days out of the year. And the bear market will end when we least expect it.

QWhat’s the maximum that I can contribute to my 401(k) plan for 2009?

AThe Internal Revenue Service has raised the maxi- mum contribution employees can make to their defined contribution plan to $16,500 for 2009, up from $15,500 permitted for 2008. Workers age 50-plus can also contribute a “catch-up” of $5,500—for a maximum of $22,000.

QMy firm is no longer matching my 401(k) contribu- tion. I’m 51. Should I keep saving in the plan?

AYes, at your age saving for your future is important. A 401(k) plan carries fewer fees and greater tax advantages than other retirement savings accounts such as an IRA. However, investing in an IRA is a good idea after you’ve maxed out your 401(k) contribution.

QDo I have to pay income tax on my Social Security benefits after age 72?

AThe amount of taxes you pay will depend on your other income, like investment income or a salary. If you file an individual tax return and your total income is more than $25,000, you will have to pay federal taxes on your benefits. If you file a joint return, you will have to pay taxes if the total income is more than $32,000. According to the Social Security Administration, less than one-third of beneficiaries pay taxes on their benefits. —Carole Fleck

; The issue: Is an employer liable if employees don’t understand changes in retirement plans?

Retirement was rarely a worry for Gisela Broderick. She thought her employer, Cigna, had her covered—that is, until she actually retired in December 2004.

But Cigna had changed its retirement plan in 1998. Broderick, 64, of Tolland, Conn., had left the company for three years before returning in 2000. She says the company did not properly notify her of the plan change, as required by the Employee Retirement Income Security Act (ERISA). In fact, her retirement benefit dropped dramatically. Now she and 27,000 similarly affected Cigna workers have gone to court seeking lost benefits.

“It was so unfair,
and it still makes me
so angry,” says Brod-
erick. “The company
was deceptive. I fight
on not just for myself
but for the thousands
of other employees
who probably still
have no idea what
Cigna has done.”
Broderick worked as
a project manager for Cigna’s information
technology department from 1980 to 1997,
and was covered by a traditional defined
benefit pension plan. She returned to
Cigna in 2000 and worked four more
years before retiring. But she was not
grandfathered into the old plan, as she
expected. Nor was she notified when
Cigna rehired her in 2000 that the pen-
sion program had changed.

Her new plan is a cash-balance plan, and
it operates more like a 401(k) with em-
ployer contributions accumulating into a
lump-sum cash disbursement when the
employee retires. Unlike younger work-
ers, older workers like Broderick who are
switched from a defined benefit plan to a
cash-balance plan generally face a signifi-
cant decrease in benefits as a result.

“It still makes me so angry,” says Gisela Broderick about the loss of pension benefits from her former employer, Cigna.

and appropriately.”
But in February a federal judge ruled
that Cigna had misled Broderick and the
other employees and eventually awarded
them $94 million, less than one-third the
amount sought by the former employees.
Both the company and the employees are
appealing the ruling.

“This issue directly affects our members and their retirement security,” says Mary Ellen Signorille, senior attorney for AARP Foundation Litigation, which filed a friend of the court brief. “Employees in midcareer have to be able to count on what their retirement incomes will look like.”

LEFT: MARK ZINGARELLI; RIGHT: JOSHUA LUTZ/REDUX

; What it means to you: Employers must clearly communicate changes in employee retirement plans. If you’re confused, take the initiative and contact your company’s human resources officer. ;

Experts: Bill Losey on investments; the IRS on retirement contributions; Jean Setzfand on 401(k) plans; Stan Hinden on Social Security benefits. Send your questions to: Ask the Experts, AARP Bulletin, 601 E St. N. W., Washington, DC 20049, or e-mail askourex-perts@aarp.org. Check out bulletin.aarp.org for previously asked questions and answers.