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A Monthly Newsletter Source of Financial Sources • Pension Protection Act Misleads Small Business 401(k) Plan Sponsors • Minimize Future Investing Regret • Ask Not for Whom the Bell Curve Tolls. It Tolls for Thee • Lifetime Income Planning Protects Wealth from Risk • The New and Unimproved Rules Regarding Non-spousal Beneficiary Rollovers • Retirees Need Accurate Out-of-pocket Medical Expense Projections to Plan for Health Care • Six Ways to Improve Your Personal Financial Record Keeping Pension Protection Act Misleads Small Business 401(k) Plan Sponsors Small businesses rejoiced last August when President Bush signed into law the Pension Protection Act of 2006. The act was a long time coming, and the final product reflected several major compromises between versions from the House and the Senate. So now you, as a small business owner, see the Pension Protection Act and you think, finally, the Federal government has stepped in and made it easier to choose the best, most appropriate plan for your employees. Unfortunately, that is just not so. The Pension Protection Act is three steps forward, two steps back. It provides a sheen of respectability to an industry that still will not grapple with the real costs of a 401(k) plan. The most egregious oversight in the PPA is its lack of any requirement for full and clear disclosure of all fees. Costs of most plans are borne by the individual participants and excessive costs, caused by hidden fees, are still undisclosed despite the “protections” put in place by the PPA. Excessive costs hidden deeply in the contract of a plan will significantly reduce how much a worker can save during their career. Excessive fees of 1% a year or more, which is common in insurance group annuity contracts, can reduce the final payout to the retiree by hundreds of thousands of dollars. The Senate version of the bill specifically eliminated the possibility of conflict of interest. It said that, for example, a plan provider cannot be compensated for providing advice on its own funds. But the House plan, which was the one that finally passed, did allow the provider company to give advice on the funds they have included in the plan. That is an example of the chicken guarding the hen house. Granted, there are provisions that must be adhered to in the PPA to protect the participant. But there are no “cops” in the neighborhood when a plan provider (mutual fund company or insurance company) sends its representatives to your firm to talk to your employees. These representatives may have a conflict of interest when they give investment advice to your employees. Then too, the agents, especially those from insurance companies, may end up cross selling other company products to your employees. The employees come in for help in choosing investments in their plan and could end up with a life insurance proposal. The Pension Protection Act provisions did not discuss how mutual fund companies or insurance companies are actually getting paid because there is no unambiguous summary sheet of fees required by the Act. Your representative may be ethical this year, but at next year’s enrollment meeting, who knows? Consider instead, hiring an objective 401(k) plan provider who has no conflict of interest. That firm can offer your employees the very best funds available for the plan, funds in which the advice giver has no stake except that they do well for the company’s participants. 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. Minimize Future Investing Regret How many times have you bought something spontaneously, then after you got home regretted the decision? Most spontaneous decisions are based totally upon the emotion at the moment; a snap decision based upon a quick and often faulty evaluation. Examples might be: the big television you bought for the bedroom that won’t fit in your wife’s heirloom armoire or a fabulous air compressor for the garage that uses 220v, but your garage isn’t wired for 220v. These decisions were not analytical or adequately evaluated. These emotionally driven purchases caused you to experience regret once you realized they had to be returned. Of course, if they couldn’t be returned it caused a totally different emotion, but that is not the subject here. Generally speaking, the best time to buy something is when you don’t really need it. Another type of regret is when you purchase something and find out that it doesn’t live up to its claims or it just doesn’t work like you thought it would; you have become a victim of marketing hype. An entire industry has come into being to assist at trying to overcome this – consumer reports. Hopefully this is all so you won’t have to experience regret at a later time – minimizing future regret. Investors seem to forget history when making investment decisions. It has been over 4 years since the last bear market ended. This is like a review of ancient history with most investors; those whose focus is on the latest piece of market information, economic report, or Internet blog. Suffering investor regret is painful, and more times than not, more painful than any poorly evaluated purchase of a consumer good. Yet, for some reason, when it comes to an investment, most won’t even make the effort to return it (sell it). For some unknown reason, people do not react to financial emotions in the same way that they react to emotions occurring outside of the world of finances. Holding onto a losing investment, regretting you bought it, and justifying to yourself that when it gets back to where you bought it, you will sell it, is not only common, it is painfully foolish. Have you ever done that? In fact, most have and will do so again. This is why a rules-based approach to the markets is necessary – it removes the human fallibility – that common trait that causes you to regret your emotionally-charged decisions. Hope and fear have no place in the decision-making process, especially when it comes to investments. You must overcome this in one way or another. If you can’t, you should consider professional help – an advisor who follows a rules-based technical model that tries to stay invested when the risk is acceptable and tries to keep assets in defensive positions (generally cash or cash equivalents) when the risk is too high. Sticking to this model minimizes regret when you find yourself on the wrong side of the market with your investments. 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 Ask Not for Whom the Bell Curve Tolls. It Tolls for Thee Most investors and financial advisors are familiar with the concept of the bell curve, a term used to describe the most commonly observed distribution of data.* It is important to consider that a similar bell curve could be plotted describing the quality and wisdom of the investment advice you receive. The bell curve is normally used as a numerical illustration tool. We know, for instance, that some mutual funds achieve superior results over time and some, very poor results. The mass of funds are crowded in the middle. Morningstar’s star ratings are just a variation on this. The value in knowing for whom the bell curve tolls lies not in how it illuminates statistical results, the most visible, easily accessible tip of the bell curve iceberg, but in the bell curve-like distribution of judgment-making skills and analytical abilities. A true but seldom acknowledged reality is that you can expect to see a bell curve-like distribution in just about every endeavor, including, and perhaps especially, investing Pay heed to this sobering thought: most of the information you get is from the great, undistinguished middle of the bell curve: 68% of everything you read and hear in the financial media, 68% of the opinions generated by Wall Street analysts, 68% of the advice generated by talking head experts on CNBC is--no matter how fancily it is packaged--100% average and of little added value. Worse, an additional 16% is outright wrong and harmful. You’re left with a measly 16% that is likely to be superior actionable advice you can benefit from. (If one factors in survivorship bias, i.e., the fact that the worst of the worst simply disappear over time, the numbers are skewed even worse to the downside.) There is a way to reduce the impact of luck on returns (or better said, increase the potential frequency of lucky outcomes) and an investor can manage to find a more favorable long term place on the bell curve. To avoid the worst of the bell curve you must resist the ‘dark side:’ the professional tendency toward complexity. Seek simplicity. Investors or advisors can construct a “Best of Breed” analytical framework. There are several specific criteria that go into determining best of breed, including, but not limited to:
Using this template, you’ll pretty soon come to two conclusions: First, that it is difficult to fit many popular technology companies into this framework. The need for market segment domination, along with sustainability and high destiny control is a high bar for most tech companies. And second, that most of your selections will tend to be large caps. While there are certainly exceptions, most companies that have established durable brands, dominate their market and have sustainable advantages will, by virtue of those characteristics, have already grown into a large company. Some examples of best of breed stocks in a range of industries are United Health, Proctor and Gamble, Apple, Toyota, Goldman Sachs, McDonalds, Altria, and Vornado Realty. When structuring this portfolio, you want to enlarge the metaphor to also include ‘Best in Show’ positions. These are those best of breed stocks about which you have the very highest conviction level. These you overweight. Note how you start with strength and move to greater strength. Admittedly, a solid, common sense approach, is nothing particularly special. The investor or small advisor, though, has a competitive advantage in how they manage the positions they’ve acquired through the best of breed approach. Some of these moves—and note some—are actionable. An investor can trade a portion of the position, cutting back or adding on as the case dictates. It is possible for the small advisor to have a pricing advantage over the large institution. Any number of trading platforms can provide state of the art execution at prices that are astonishingly low. The small advisor can often move faster than the large institution. Let the bell curve work for you, even inspire you. Most of the decisions that most of the managers and traders are making are poor to average. You’re competing against the entire bell curve, not just the brilliant folks residing on the right tail. With the trading advantage that small size gives you, you have the potential to move further right on the bell curve than you’d ordinarily expect. Keep in mind that current results are no guarantee of future results. However, this is about as simple a strategy that works that you will ever find. Act on this acronym “TO BOB: which means TRADE OPPORTUNISTICALLY BEST OF BREED” and you will avoid the pitfalls of the bell curve. 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. Lifetime Income Planning Protects Wealth from Risk Lifetime income planning (LIP) is important to all families who have lived within their means and are now facing important decisions about how to make their savings and investments meet their future financial needs and lifestyle desires. Lifetime income planning employs strategies that protect your wealth from risks associated with longevity, inflation, stock market performance, excess withdrawal, and health care costs. LIP strategies are designed to take into account a number of areas that wealthy families rarely have organized by one team of advisors who communicate closely. In many cases, wealthy families have a group of advisors who rarely if ever communicate. This kind of advice is called “silo” advice and is not in the best interests of a comprehensive lifetime income plan. There are three key strategies that your comprehensive financial team must address to create a lifetime income plan that will work with your own circumstances:
Find a financial advisor who can keep all of these functions under one roof and your lifetime income planning strategies will become a reality and make more sense to you and to your family. 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. The New and Unimproved Rules Regarding Non-spousal Beneficiary Rollovers On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. Among its numerous provisions was one that changed the inheritance landscape for unmarried couples, married same-sex couples, and anyone else who may be named as beneficiary of a non-spouse's retirement plan. Before the Pension Protection Act (PPA) went into effect, when a non-spouse inherited assets from a decedent's qualified retirement plan, such as a 401(k) or 403(b), the non-spouse was forced to withdraw most if not all assets immediately, triggering a large tax liability. The rationale being that the employer did not want to bear the administrative cost of having this non-employee in their plan. The good news is that PPA changed this by allowing all non-spouse beneficiaries who inherit qualified plan assets to roll over his or her interest into a beneficiary Individual Retirement Account (IRA). This allows for the continued tax deferral of accumulation while mandatory distributions are taken over the beneficiary's life expectancy. The bad news is that the Internal Revenue Service just released notice 2007-7, which basically states that employer plans may offer this non-spousal beneficiary rollover option, but they are not required to do so. In other words, if a plan chooses to incur the cost of amending its plan documents to benefit non-spouses, so be it. However, qualified plans will not be forced to do so. The only loophole here is that if a retirement plan currently allows non-spouse beneficiaries to withdraw inherited plan assets over a 5-year period, which is more likely the exception than the rule, then the non-spousal rollover is permitted as long as the rollover into the IRA takes place prior to the end of the year following the year of the plan participant's death. So, where do we go from here? Back to square one. In my book, Money Without Matrimony: The Unmarried Couple's Guide to Financial Security, which was published before the PPA of 2006 was enacted, I suggested that individuals with inactive retirement plans from former employers consider the advantages of rolling the assets over to an IRA to maximize their non-spouse beneficiary's tax deferral versus maintaining the qualified plan account for its enhanced creditor protection. (Assets in a qualified retirement plan are generally untouchable to creditors, while IRA assets could be up for grabs.) Then in mid-August 2006, I started advising clients to keep the assets in the qualified plan to maintain the creditor protection and get the added benefit of the non-spousal rollover. Now that the 2007-7 clarification has been issued, I am going back to the pre-PPA days and my pre-PPA ways. Given the intricacies of this new ruling and the opportunity for error, I am recommending that clients, barring any explicit creditor issues, simply roll old qualified plan assets into IRAs. 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 Retirees Need Accurate Out-of-pocket Medical Expense Projections to Plan for Health Care 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? Healthcare will be the second greatest expense for retirees in their retirement – after housing. 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. 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. Six Ways to Improve Your Personal Financial Record Keeping It’s important to pay attention to the details of your personal financial record keeping. Here are six action steps that can help you get control and get organized.
Laura Moore, ClutterClarity, Cambridge, Mass., provides on-site clutter-clearing services, coaching, and workshops, " It's Your Mess, But Not All Your Fault." laura@clutterclarity.com 508-349-1661. |