April
2007
A Monthly Newsletter Source of Financial Sources
Don't miss this month's timely story ideas, direct dial phone
numbers, and E-mail addresses of these accessible experts!
401(k)
• What Plan Sponsors Need to Know About the Cost of the Company 401(k) Plan.
INVESTMENTS
• Corrections, Whipsaws, and Things that Go Bump in the Day
• What are the Chances for Armageddon in the Real Estate Industry?
RETIREMENT & ESTATE PLANNING
• Taking the Right Love Options at Retirement
There are strategies where retirees can have their cake and eat it too.
• Reverse Mortgages Will Become HUGE!!
PERSONAL FINANCE
• Getting on the Right Side of the Taxman
• A Tax Return Says a Lot About Someone's Financial Planning—or Lack of It
PRACTICE MANAGEMENT
• Advisors Must Provide Accurate Out-of-pocket Medical Expense Projections to
Plan Client's Aging Health Care
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401(k) Plans
What Plan Sponsors Need to Know About the Cost of the Company 401(k) Plan.
The Pension Protection Act of 2006 does not discuss how mutual fund companies or insurance companies are actually getting paid for the service of providing 401(k) plans. Thoughtful professionals in the 401(k) industry see this as a serious flaw in the Act and are calling for an unambiguous summary sheet of 401(k) plan fees.
Plan sponsors, in order to fulfill their duty as a fiduciary of the plan, must demand an unambiguous summary sheet of 401(k) plan fees. Ask your provider to sign it so that further expenses cannot be added without your consent. Understand the vast differences between an insurance company group annuity (with all its hidden fees) and the costs associated with hiring an objective 401(k) plan provider who has no conflict of interest.
An independent advisor can offer your employees the very best funds available for the plan, funds in which the plan provider has no stake except that they do well for the company's participants. On the other hand, advice from a plan provider who stands to gain from certain funds being chosen for it, will always be tainted by the appearance of a potential conflict of interest.
An unambiguous summary sheet should be extremely easy for providers of 401(k) plans to create. It should include the menu of costs that come from a Third Party Administrator Below is a 401(k) Plan Summary Sheet sample.
Summary Sheet for ABC Company 401(k) Plan
Plan Costs:
• One time set up fee for the plan
• Annual maintenance fee
• Cost per participant
• Cost for non-recurring actions, such as processing a loan from the 401(k) plan for an employee.
Costs charged by mutual fund companies whose products are included in the plan:
Mutual funds have expenses and shareholders of those funds are charged a portion of those expenses. These are appropriate, but your plan's advisor should be putting you in mutual funds that have low expense ratios.
Advice Costs to Plan :
Most investment advisors will charge a percentage of assets under management. This advice includes periodic reviews of the performance of each fund in the plan and developing a strategy for changing funds when necessary. Cost to the plan for the investment advice from an advisor can be 0.4% to 1.5%. (Advisors with long, successful track records generally charge more than others.) Or the advice cost can even be as low as 0.3% if the investment advisor is merely recommending a menu of funds for the company and will not be providing further performance reviews.
Advice Costs to Participants (optional):
Many independent advisors provide services in the 1% range for active management of 401(k) portfolios for participants but these fees are paid directly to the advisor who takes discretionary responsibilities for managing assets inside the worker's 401(k) plan.
This completely separate fee has nothing to do with the costs of the 401(k) plan itself.
What should not happen:
Group annuity insurance contracts cannot meet the criteria of an unambiguous summary sheet. Their contracts, often delivered three months after the plan is already transferred to their company, are ambiguous and unclear, particularly when it comes to fees. One red flag phrase is "and other recurring charges," which in theory has no cap.
Add the following stipulation to your summary sheet and make your provider sign and date it.
"The charges on this sheet are the only costs that are being charged to the plan, and there shall be no further fees coming out of this plan for any reason other than those charges specifically listed on this summary sheet."
Protect your plan and your employees from the serious drain on performance of excessive, hidden fees. Know that even an excessive fee of only 1% can reduce your employees’ career savings by as much as 25% or more.
Ken Weber, President, Weber Asset Management, Lake Success, N.Y., can be reached at ken@weberasset.com, or 800-438-3863. Weber provides full service 401k) plan design, implementation and performance evaluation.
INVESTMENTS
Corrections, Whipsaws, and Things that Go Bump in the Day
Most market analysts will tell you that market corrections are times when the market takes a rest and declines for more than just a few days. Ten percent has also been bandied about for years as to what makes a good correction, or at least what generally qualifies as a correction in the market. Most will also state that these corrections, while painful and downright scary, are a necessary event for a healthy uptrend to resume. This argument is not unlike the one about recessions being beneficial for the economy. Free markets require periods to realign from their excesses. Good corrections in the market are actually healthy, just like shallow recessions in the economy. A closer-to-home analogy might be how medicine helps when we are sick. It is when they get beyond that stage that people pay a dear price for complacency.
Once a correction begins, the question to all those who have immediately identified it as such, is this: how do you know if it is just going to be a correction? The answers are wide ranging and usually more steeped in hunches and hope than anything. The follow up question is a little different: how do you know it is not going to develop into a full-fledged bear market? Their answers are usually even less well formulated than their first answer.
Bear markets are usually defined as declines of greater than 20%. Since World War II there have been 10 bear markets of greater than 20% using the S&P 500 Index as the measure. The average decline was 31% and the average duration was 14.8 months. For the S&P 500 to rise above its previous high at the beginning of the bear market (breakeven time) it took the previous 9 bear markets, an average of 2.72 years. The most recent bear market cannot be included because the S&P 500 has yet to reach a new high – over 7 years and counting since the S&P 500 peaked in early 2000.
The market has recently experienced a decline. Tactical asset managers use rules that will not let them ride out drops in the market. On March 1st, two days after the first big drop, tactical asset managers had most of their actively managed accounts into fully defensive positions. They did not know if a few down days would turn into a correction and they are not going to find out by riding it down with your money or theirs. If the model improves and gives a the green light, they will re-enter the market.
If assets are re-entered at a price above where they were at the beginning of the downturn, then it is known as a whipsaw. A whipsaw occurs when you exit the market, the market does a quick reversal, and by the time you re-enter, the entire event results in a small loss. Whipsaws are an inevitable consequence of not adapting a buy and hold mentality. It is just the cost of doing business.
Watching the market plummet from the sidelines is not a bad thing, emotionally or financially. Money managers never know if a few down days are going to turn into a correction or if a correction is going to turn into a bear market. No one does (despite claims of such), but at least we are prepared for the worst outcome. Tactical asset managers participate in the good times and avoid the bad times. Are they always right? Heck no, but we also know that there is only one thing worse than being wrong, and that is staying wrong.
Gregory L. Morris is the senior portfolio manager for PMFM, Inc. Prior to this role, Greg served as a Trustee and Advisor to the MurphyMorris ETF Fund and as Treasurer and Chief Executive Officer of MurphyMorris Money Management Co. Greg has been a technical market analyst for almost 30 years. He was a Navy fighter pilot, is a graduate of the Navy Fighter Weapons "Top Gun" School, and holds a degree in Aerospace Engineering from the University of Texas. PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) investment advisory services in the nation. As of 12/31/06, PMFM manages $870 million. The firm has increased its assets under management by nearly 25 percent in the last year. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia who has worked with thousands of clients and offers their services to plan sponsors and through partnerships with 401(k). You can reach Gregm at 800-222-7636 or greg.morris@pmfm.com
What are the Chances for Armageddon in the Real Estate Industry?
Certainly any one with a contrarian bent should be looking at a list of real estate company and home builder stocks to buy and begin now, in second quarter 2007, to slowly fill their stock portfolio’s real estate position.
Homebuilder executives themselves have been remarkable contrarian indicators in the past. Everyone looks to the management of companies for indications of how robust or stressed a sector may be. Over the last three to four years, real estate and home builder executives’ projections have been wrong. They were most optimistic at the peak in 2005 and right now they are hanging their head in gloom. What were they seeing that turned out so wrong? At the end of 2005 and early 2006, Robert Toll, chairman of Toll Brothers, a large, highly respected custom home company was saying there was no bubble, the real estate upturn was going to go on for some time – the pessimists were just plain wrong. Instead, the industry insiders were wrong.
If they were so wrong at the top, what if they are still wrong at the bottom. (The last time we saw this was talking to tech execs in the 1999-2000 time period. John Chambers (what company) was famously optimistic at the top.). He was also noted to be hedging bets at the bottom. Who was optimistic about tech in fall of 02? In hindsight, it was probably the last great real estate buying opportunity when everything was priced for Armageddon.
It is clear that in addition to the lower demand for new homes, and increases in interest rates, we also have added the sub prime mortgage defaults in the low credit end of the mortgage range as a stress on the industry.
However, when you think about homebuilders, companies like Toll Brothers, a financially-sound company, sell homes that begin in the $600,000 range before the normal upgrades. Many of their purchasers make large down payments from liquid assets and are very credit worthy. These homeowners are not going to impact Toll Brothers with default mortgages.
Everything negative that can be thrown on the table has been thrown. History tells us that negative headlines means that the negativity has been factored into current prices and that current negativity is not news. Unless you expect the housing downturn to expand exponentially, there is a great likelihood that we are close to the bottom in real estate stock prices.
Negativity in the homebuilders industry and the real estate slowdown are real. The question is, can investors look past that and see if the negatives are factored into the stock price. If the answer is yes, it is time to start rebuilding your real estate position.
Robert Markman, Portfolio Manager, the Five Star Markman Core Growth Fund (MTRPX) -- a dynamic and responsive large cap growth, no-load mutual fund with a portfolio strategy developed to adapt to the changing investment environments. His techniques and processes have helped him guide his fund to five star Morningstar ratings over the past three and five year periods. www.markman.com 952-920-4848.
ESTATE PLANNING & RETIREMENT
Taking the Right Love Options at Retirement
There are strategies where retirees can have their cake and eat it too.
There is an important decision looming for you and your wife as you prepare to retire. Your pension plan may offer you a choice of distributions: you can choose a higher distribution if your pension ends with your death, or a smaller distribution if you intend that a portion of your pension continue to support your wife until her death.
In the first choice - Maximum Life Option -- you get your maximum pension until you die, but after your death, your spouse gets nothing.
If you choose one of the Joint Survivor Options, you might drop from a maximum of $2000 a month to $1600 a month, but your wife gets a portion of your pension until her death. However, if your wife dies immediately after you opt for the joint survivor option, you are stuck with the lower payment for the rest of your life. The $400 a month that you have given up to support your wife, is actually the most expensive life insurance policy you have ever purchased. Your pension plan takes that $400 a month and buys life insurance on you and pays your spouse with the proceeds after you die. There are better strategies.
When there are no health issues, and you qualify for your own life insurance policy, you could take the full $2000 monthly payment and use a portion (about $200 per month) to pay for a lump sum insurance policy on your life that would generate income for your wife. If your wife dies immediately after your retirement, and you no longer need to pay on a policy you had secured for her benefit, you can cancel your life insurance policy. This, in essence, gives you a raise equal to the original amount of your maximum life option. If you both die in a car accident, your contingent beneficiaries will get the proceeds of the life insurance on your life. If you had chosen the joint survivor option, your pension plan would continue to pay only the joint survivor amount and you would have lost the additional $400 for life. Remember, pension plans pay only as long, typically, as the worker and/or their spouse are alive, In effect, taking the maximum life option, and choosing to protect your spouse with an insurance policy, allows the worker to have his cake and eat it too.
How you take your retirement income is crucial in protecting and enjoying your hard earned assets. Don't know what to do? Contact a fee-only advisor to help guide you in this decision-making process.
Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers.
Reverse Mortgages Will Become HUGE!!
The biggest banks in the country are entering this business and already have announced fixed rates as low as 6.2% for the lifetime of borrowers. This will allow homeowners to use the equity in their real estate to pay for uninsured health care costs including long-term care.
Take the Georges. They are both 79 years old, but Albert has just had to put Jenna into a nursing home because her Alzheimer’s was more than he could continue to manage safely. He feels certain that their joint assets are not enough to pay for her care and his ongoing expenses. He came to his advisor inquiring about options for managing the cost of his wife’s care and his living expenses going forward.
Fortunately, for Albert, his home is worth $1.5 million. It is the worst time to sell for Albert because his resort community is seeing a very long sales cycle for homes in his bracket. The market will probably come back in three to five years, but Albert’s pressing need is today.
Albert’s advisor presented four strategies for him to consider:
1.Use all of their liquid assets until they are gone. The disadvantage is that Albert has no idea how long his wife will live and whether he will be able to pay for her private pay nursing home. Albert is also emphatic about not wanting to bet his financial security on his wife’s longevity.
2.Annuitize the assets left to provide a regular ongoing income until death. The disadvantage is that he loses the principal forever.
3.Pay his wife’s bill for five years and transfer the rest of their assets to a trust. After 5 years his wife will qualify for Medicaid. The disadvantage is that he will lose over $500,000 of their liquid assets which produces the income he needs for his own expenses.
4.Take out a new jumbo reverse mortgage to access equity in his home. The reverse mortgage can pay all of the expenses for the next 5 years. At that time, if his wife still needs long-term care, all the liquid assets are protected without the Medicaid spend down requirement. For Albert, this option had the fewest disadvantages.
Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net.
PERSONAL FINANCE
Getting on the Right Side of the Taxman
Are you paying the taxman more than his due? Or are you receiving less than you deserve from his largesse? As April 14 dawns, you as an investor have a powerful opportunity to review the tax-efficiency of your financial profile:
Are you allocating portfolio assets in the most tax-efficient manner, with interest- and dividend-generating vehicles held in tax-deferred accounts while low-income growth vehicles are held in taxable accounts?
Are you making full use of your retirement vehicles to include personal (IRA) and corporate (401(k)) plans?
If you are an entrepreneur, do you have the right retirement vehicles to maximize your tax-deferred savings opportunities such as Self-Employed 401(k) plan (20% deferral of net income plus $15,000 in salary), or a Uni-Defined Benefit plan (up to 75% deferral of net income)?
If you meet Roth income guidelines, have you converted your Traditional IRA to a Roth IRA, removing the investment from future taxation and creating a tax-free investment for heirs?
Did you make your 2007 (yes, 2007!) IRA contribution in January, thereby securing 12-months of tax-deferred return on the investment?
Are you utilizing tax-free 529 Plan savings vehicles for junior’s college expenses?
If you are anticipating the sale of real estate, have you explored a 1031 exchange or a charitable remainder trust to shelter gains from current taxation?
Have you considered a 1035 exchange, to replace outdated annuity contracts with current, higher-yielding contracts, sheltering gains from current taxation?
Do you have a strategic gifting plan in place to systematically remove assets from your estate?
As you write the checks and close the books on yet another tax year, do yourself a favor and lessen the pain of the coming year by exploring each and every opportunity to improve the tax efficiency of your financial life. Then sit back and reap the rewards. Paula Chauncey, CFA, Managing Partner, être llc, 617-716-0257 works with individuals, and their closely held businesses, to develop and execute wealth-building strategies. pchauncey@etrellc.com.
A Tax Return Says a Lot About Someone's Financial Planning—or Lack of It
Tax filing season is the time of year when many taxpayers focus on getting their financial houses in order. There are many reasons why a financial planner will review the most recent income tax filings. For the financial planner, obtaining the tax returns as part of the initial discovery and intake process can be quite an educational experience. Here is what to look for on the income side of the equation.
A W-2 form includes wages subject to income taxes and the amount contributed to a qualified retirement plan. This is a quick way to determine if the taxpayer is maximizing his/her contributions to the company 401(k) (or 403(b), etc.). This is a great segue into a conversation about retirement planning, including the ability to dig deeper and determine if deferred compensation and/or other types of tax-deferred savings plans are available at the employee level.
Schedule C income indicates that the taxpayer runs a business or is an independent contractor. Often, many Schedule C filers are not aware of self-employed retirement plans that take advantage of higher contribution limits than traditional or Roth IRAs. You can easily determine whether the taxpayer contributed to a self-employed plan by reviewing the SEP contribution line (line 28) on the 1040.
If you see an entry in line 15b - IRA distributions - you should probe further. Generally, one only takes a taxable IRA distribution for three reasons: 1. The filer is over age 70 ½ and distributions are required, 2. The filer inherited IRA assets and must take a distribution each year, or 3. The filer had to tap into the account for some unexpected reason. Regardless of the scenario, a financial planner can add value, perhaps by ensuring that one is, indeed, minimizing the required payout and thereby leaving as much as possible in the account to grow tax-deferred. Or, in the case of the unexpected necessity to distribute funds, perhaps a conversation about emergency funds is in order
If the taxpayer has a substantial amount of dividends, interest, and short-term capital gains and is in a relatively high marginal tax bracket, the financial planner can address the pros and cons of tax-advantaged investments, including annuities, home-state municipal bonds, and growth-oriented mutual funds with low turnover. If any of these income-generating investments are targeted towards a specific goal - college funding, as an example - the financial planner can start the dialogue about the benefits and pitfalls of using a 529 plan.
Again, this is a quick review of the "top line" - income. A closer look at the next page of the 1040 will give the financial planner better insight as to the amount of debt the taxpayer has, how charitably inclined he/she is, which may tell you something about their priorities, and whether the taxpayer engages other financial/tax professionals or is a do-it-yourselfer. All of this information is invaluable to the intake process.
Debra A. Neiman, CFP®, author of Money Without Matrimony, is president of Neiman & Associates Financial Services, LLC, providing full service financial planning.
She can be reached at 781.641.5700, or deb@neimanonline.com. Website for the book is http://www.moneywithoutmatrimony.com
PRACTICE MANAGEMENT Advisors Must Provide Accurate Out-of-pocket Medical Expense Projections to Plan Client's Aging Health Care
A new product to the market "HealthView" from WorldCare North America, Cambridge, Mass., allows advisors to accurately estimate the health care expenses a client might incur in a customized calculation. WorldCare North America's HealthView provides a personalized analysis of an individual's health risks - together with the projected cost associated with those risks - based on their health, lifestyle and family history. This is the information needed for accurate retirement planning and accurate living in retirement planning.
“We have merged actuarial information, cost per disease information, and placed a value - that is cost - on lifestyle risks to create a proprietary product that gives planners information than has previously been unavailable," says Ron Mastrogiovanni, president.
HealthView is sensitive to clients' concerns about not revealing too much about their health issues to their advisor. The clients are able to go online, fill out the health survey and the system will only provide the advisor with the dollar amount total, ensuring complete medical privacy for the client.
The well-publicized Employee Benefit Research Group July 2006 Issue Brief reported that couples, age 65, with employment-based retiree health benefits living to average life expectancy could need as much as $295,000 to cover premiums for health insurance coverage and out-of-pocket expenses during retirement. Out-of-pocket expenses for an average 65 year old couple who do not have access to employment-based retiree health coverage is approximately $154,000 to cover premiums for Medicare Parts B and D, Medigap, and out-of-pocket prescription drug expenses (if they have average drug use).
Although these are valuable projections, they are average projections that do not take into account an individual's current conditions, lifestyle, medical history, and family medical history. In addition, these projections are most likely lower than a retiree's actual expenses. The EBRI Study states that these projections are probably underestimating the amount of money needed in retirement for healthcare expenses since healthcare costs may increase faster than projected, or if individuals live beyond average life expectancy.
How can financial advisors help their clients plan for out-of-pocket healthcare costs in retirement without accurate projections? It's not possible, and this new product brings accuracy to advisor's financial projections.
Ron Mastrogiovanni is the president of WorldCare North America, a provider of medical advisory services including Web-delivered health assessmen programs that offer personalized health risk tools and analyses. The company also offers independent medical consultation services through some of the nation's leading research institutions, including Brigham and Women’s Hospital, Dana-Farber Cancer Care, Duke University Health System, Massachusetts General Hospital, and UCLA School of Medicine. WCNA's platform of services is provided to consumers through financial institutions, affinity programs and employers. To reach Ron Mastrogiovanni, call Joanna Flynn, WorldCare North America – 617-250-5167.
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