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A Monthly Newsletter Source of Financial Sources • Managed Accounts Can Avoid Built-In Performance Issues of Target Date Funds. •Mutual Fund Companies Focus on Creating Favorable Impressions, Not Growing Assets: • Cost Basis, Incomplete Tax Returns, and the IRS • Top Ten “Must” Financial Planning Strategies for Committed, Unmarried Couples • 16 Strategies for Saving Estate Taxes #6 – Charitable Lead Trusts Managed Accounts Can Avoid Built-in Performance Issues of Target Date Funds Retirement plan professionals are faced with serious decisions when deciding what to choose as their Qualified Default Investment Account (QDIA). Target date funds have been anointed as the fallback position of choice, and they make up the bulk of the QDIA assets. However, retirement plan professionals should pay attention to the superior results available from managed accounts for 401(k) plan participants that avoid the built-in difficulties of target date funds. All target date funds do not have the same equity exposure that could lead to fiduciary problems for the plan sponsor. For instance, T. Rowe Price Retirement 2020 is 75% equity, Principal Lifetime 2020 is 69% equity and Fidelity Freedom 2020 is 65% equity. The plan sponsor may have a target date fund in a multiple fund lineup that is simply a bad performer. For instance, recent 3-year returns for 2010 showed a wide variance in performance with the best performer at 8.54% and the worst performer at 3.38%. The 3-year returns for 2020 funds show the same discrepancies. The best 2020 performer is 9.46% and the worst performer is 5.09%. Interestingly, both the best and worst performing 2020 funds had 57-75% equity. • It is unlikely that plan participants will use the target date funds correctly: - Recently Kohler Corporation removed all lifecycle funds from their lineup because their misuse was so universal that they were causing more harm than good. • The benefits of managed accounts are numerous: - A managed account can be actively managed by professionals diligently working to protect assets on the downside and grow assets when the market is rising. As an example, look at 401k Toolbox’s Capital Preservation 70+ - a managed account strategy, comparing it to Fidelity Freedom 2010 target date fund, and T Rowe Price 2010 fund.
Plan sponsors must investigate offering managed accounts to their 401(k) plan participants, particularly in QDIAs, to avoid the predictable problems stemming from the increasing numbers of target date funds inside 401(k) plans and their built-in performance issues. PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 12/31/07, PMFM manages more than $1 billion. 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. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach National Sales Manager Tim McCabe at 800-222-7636 or tim.mccabe@401ktoolbox.com. Mutual Fund Companies Focus on Creating Favorable Impressions, Not Growing Assets: Marketing professionals are changing the way fund companies do business. There are dozens of marketing companies working to convince mutual fund managers that the idea of “actual performance” is not the primary consideration in mutual fund distribution. No, they say, wrong! Success equals “creating favorable perceptions.” What is the upshot of making the marketing of good perceptions the principal function of a mutual fund company? Placing a company’s emphasis on creating favorable impressions, in order to gather assets, leads fund companies to make moves that would never be made by a company whose primary objective is investing. The new emphasis on marketing “perceived performance” is connected to five industry trends that leave investors at a disadvantage. They are:
Make no mistake: Wall Street marketers encourage mutual fund companies to manipulate consumers through intentionally deceptive marketing campaigns. In addition, mutual fund companies change the names of their funds to hide their poor performance. In January of 2001, the Securities and Exchange Commission (SEC) tightened their mutual fund regulations: mutual funds are now required to invest at least 80% of their portfolio in the strategy advertised by their name. One may wonder why the SEC did not make the requirement 100%, which would allow investors to be certain that their entire investment in the fund follows the investment strategy suggested by the name. One explanation is that mutual funds must maintain some liquidity in order to meet redemption requests. The 20% remaining allows mutual fund managers to invest some portion of the mutual fund’s assets into cash and equivalents. Further, because some money managers found out that consumers “perceived” that they are buying additional expertise when they pay higher commissions, some firms are offering front-loaded funds when those commissions add no investment value at all. Buyer beware. Pay attention to what you are buying and why. The very large and powerful marketing machines that drive the mutual fund industry offers no benefits to the average investor or to the safety of their assets. Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. 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. Media review copies of “The Sleep Well At Night Investor” now available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address. Cost Basis, Incomplete Tax Returns, and the IRS For taxable accounts, it is vital that investors keep complete histories of their securities to determine the cost basis. Mutual fund companies and brokerage firms do not always track cost basis for you. These firms are required to send 1099s to both the investor and to the IRS for any sells that occur during the year. Investors often run into problems in reporting the sale of securities. Some may forget to report a sale while others may not have the information to make a determination of the basis. Losing track of cost basis can happen when securities are transferred in kind from one brokerage firm to another and then sold. The receiving firm won’t know what the basis is and will issue the 1099 showing the proceeds from the sale. If the investor hasn’t kept all the records, she will have to go back to the old brokerage firm to request copies from their archives. This process could delay the filing of a tax return. Horror stories abound. A client who forgot to report the sale of a security and received a letter from the IRS claiming that he owed taxes and penalties and interest on $96,000 from the sale of a municipal bond fund. The client mistakenly assumed that the municipal bond fund didn’t have to be reported. Another client decided not to report a sale that resulted in a slight realized loss. He felt that it wasn’t worth the time to fill out the form just to claim a small loss. He also received a letter from the IRS claiming that he owed taxes, penalties and interest on the sale. The lesson is to always keep your transaction history and report every sale regardless of the size of the loss or the gain because the IRS is going to receive the 1099. It is better to take the small bit of time filling out a form then to have to spend the time dealing with the IRS over an incomplete tax return. Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfshim@usinternet.com. Top Ten “Must” Financial Planning Strategies for Committed, Unmarried Couples Financial planning for unmarried couples is a strenuous exercise in creating solutions for financial security that are called workarounds. They are workarounds because little of the planning is easy, but it is all vital if unmarried couples want to create the financial safety and security that smart married couples undertake to put in place. Married couples have the force of state and federal law allowing them to plan for retirement, risk management, and estate planning far more easily. Unmarried couples must work much harder to set up the same protections. The “must haves” for financial and estate planning for unmarried couples can be accomplished methodically. The strategies include the following: • Legal considerations • Tax considerations • Investment strategies • Estate Planning • Adoption • State Law • Insurance protections and risk management • Retirement Planning • Charitable Giving • Periodic Review Stonegate Wealth Management’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients. They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling. The firm manages $175 million in assets under management. Tom Geraghty, tomg@stonegatewealth.com, office, 201-791-0085, cell 908-347-3032 16 Strategies for Saving Estate Taxes #6 – Charitable Lead Trusts There are many strategies for eliminating estate or death taxes. For families who are certain they have the ability to set aside “enough” for their adult children, the charitable lead trust is an excellent vehicle to transfer a large portion of family’s assets to the grandchildren with no estate (death) taxes. While the concept of “enough” is different for all families, Jennifer and Sid Howland seem clear that giving $2 million to each grown son was “enough.” Their total estate is $10 million. Now the Howland’s must plan on managing the $6 million remainder with the lowest tax consequence possible. If the $6 million were assigned to a 30-year charitable lead trust, it could greatly benefit the grandchildren who, at the end of the 30-year term, would access the assets with no taxes, a savings of 50% or $3 million. The rules of charitable lead trusts require that trustees pay out 5% of the Trust’s assets a year. However, at end of term, whatever the size of those assets, the grandchildren will receive the principal, the growth above the 5% distribution, and all with no estate tax in the transfer. The 5% distribution from a charitable lead trust can fund a family foundation, run by Judy and George, the Howland’s children, allowing their children and multiple grandchildren to pursue charitable intentions and passions with the distributions, as long as 5% of the trust is given away each year. Charitable lead trusts may be funded after you die, and for any term of years you choose. The longer the term of the charitable lead trust, the larger the tax savings will be. A 30-year term is considered a generation skipping term and there will be no tax on the portfolio returned to the family from the trust. If the term is less than 30 years there will be taxes on the assets in the trust, but taxes will be reduced. For a ten-year trust, for instance, taxes may be reduced by 30 to 40 percent. How much is enough to give their adult children was an important question for Jennifer and Sid, but the driving force in their decision was to save more than half of their grandchildren’s inheritance by creating a 30-year charitable lead trust and eliminating a 50% estate (death) tax completely. 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. |
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