Within Washington DC, debates are currently underway, which deal with the level of fee disclosure, 401k participants receive. If you don’t understand exactly the workings of the 401k plan, you will assume that more disclosure is always better. What do believe it if I tell you that this might not be the case with regards 401k plans?
When you get a closer look at all the factors involved you will realize that at the end of it, the beneficiaries will not be getting any additional benefit from clear disclosure. More disclosure is necessary, there’s no doubt about this. If provided with more adequate and detailed information, plan fiduciaries will be in a better position when they come to take important decisions regarding investments.
It is consequential disclosure that will make a positive difference. Nowadays if an individual would like to enquire about the expenses he is paying on his 401k plan, can do so without difficulty. Nor is it difficult to understand the content and the meaning of the information. The problem comes when the individual comes to interpret the information received, since a number without any base for comparison means nothing at the end of the day.
The truth is that most people don’t really care about the workings of their 401k plans, what they do care is about the sum of money they see on their statement. When going through their 401k plan information, individuals will not be able to point out which are the meaningful parts, and which parts require questioning.
And what about the cost of disclosure? Increasing disclosure would mean increased administration work, which at the end results in increased costs. I have no doubt in my mind that these costs will be then transferred to the individuals.
The benefit of disclosure for beneficiaries lies in their ability to be able to choose between the various investment options provided. They might also be able to push the committee to making beneficial changes on the choice of investments.
So in conclusion, better disclosure to the plan fiduciaries will have a constructive impact on the investment process, thus it will also put the contributors in a better position. On the other hand, better disclosure to contributors is not really of any assistance, since the contributors simply don’t have enough interest, thus this will only result in additional cost.
Reference: http://www.401khelpcenter.com/401k/graham_fee_disclosure.html
Tuesday, March 31, 2009
Clear Cut 401k plan fees
We are living in a country that believes in customer’s rights. This is why 401k plan participants should know exactly how much they are paying in fees on their retirement plan. A recent survey conducted by the AARP says that as much as 65% of plan participants didn’t know that their plan has fees.
At present lots of discussions are on the table at Washington DC regarding the fee disclosure of retirement plans. Plan fees have been hidden behind basis points and percentages, or maybe behind the excuse that ‘it’s always been done this way’.
Today the industry still uses the same pricing scheme that it was using in the 1980s, and this scheme is very complicated and hard to explain to the archetypal lay man in the street.
People who work in the retirement industry say that calculating effectively the 401k plan fees would be expensive, with the present pricing method. This cost would obviously be passed to the contributors. They also add that the pricing structure is difficult to explain. This is very true, and this is probably the reason why exact charges are never quoted anywhere.
Fee estimates won’t satisfy people who are used to being accurate and precise. Consumers should be shown exactly how much their plan is costing, and what gains they are making on the money they are paying. People will choose a fund that suits them most, and will not necessarily go for the cheapest. Some employees may assume that the more expensive fund will provide the greatest return. Testing should be done to understand better how people react.
This industry is full of intelligent people, who can easily come up with a simpler charge structure for the lay man in the street to understand without difficulty. All service industries in the US have a simple and clear pricing system, so why not the retirement industry? What we need is a strong retirement industry, and clear information is the only way forward.
Reference: http://www.401khelpcenter.com/ackley_fees.html
At present lots of discussions are on the table at Washington DC regarding the fee disclosure of retirement plans. Plan fees have been hidden behind basis points and percentages, or maybe behind the excuse that ‘it’s always been done this way’.
Today the industry still uses the same pricing scheme that it was using in the 1980s, and this scheme is very complicated and hard to explain to the archetypal lay man in the street.
People who work in the retirement industry say that calculating effectively the 401k plan fees would be expensive, with the present pricing method. This cost would obviously be passed to the contributors. They also add that the pricing structure is difficult to explain. This is very true, and this is probably the reason why exact charges are never quoted anywhere.
Fee estimates won’t satisfy people who are used to being accurate and precise. Consumers should be shown exactly how much their plan is costing, and what gains they are making on the money they are paying. People will choose a fund that suits them most, and will not necessarily go for the cheapest. Some employees may assume that the more expensive fund will provide the greatest return. Testing should be done to understand better how people react.
This industry is full of intelligent people, who can easily come up with a simpler charge structure for the lay man in the street to understand without difficulty. All service industries in the US have a simple and clear pricing system, so why not the retirement industry? What we need is a strong retirement industry, and clear information is the only way forward.
Reference: http://www.401khelpcenter.com/ackley_fees.html
Monday, March 30, 2009
The Trouble With 401k Plans
Let’s face it, it is a reality that we have problems with 401k plans. People are blaming the fact that the money is being invested in stocks rather than more stable bonds. This is however not the case, since over the long term, shares will outperform bonds by a wide margin. The reality however is that it’s the employers who are to blame for inaffective retirement plans, since they are not matching the employee’s contribution as they should.
With the present volatile market conditions and share prices on the floor, it seems that huge amounts of money have been knocked off the retirement plan values. The issue is not the volatility, since these plans are long term investments. The problem lies with the brokers, who do not wisely advise their clients not to panic when the market value falls. They are not selling properly, and explaining all the relevant details to their clients. This flaw is leading people to panic, and withdrawing funds from their plans at the worst moment they could possibly do so.
The same had happened in Ocotber of 1987, which is one of the biggest one day collapses recorded in history. Millions of depositors had lost out when two years later the S&P 500 had rose by over 30% .
Furthermore during congress in October, it was recommended that 401k plan managers invest funds in bonds rather than shares. Well thank God this didn’t happen, since by the end of October, the Dow Jones has increased in value by at least 10%.
Things are different in the Austalian continent, where retirees are required to contribute 9% of their salary into their pension plan, and so they stand now with more than enough funds in their portfolio. In the United States, the contribution is on of the lowest in the whole world, as it stands at a mere 3%. So finally the gist of all this is; the 401k plans should be reviewed and fixed, in a way that will benefit both employers and employees.
Reference: http://www.401khelpcenter.com/401k/white_401k_aarp.html
With the present volatile market conditions and share prices on the floor, it seems that huge amounts of money have been knocked off the retirement plan values. The issue is not the volatility, since these plans are long term investments. The problem lies with the brokers, who do not wisely advise their clients not to panic when the market value falls. They are not selling properly, and explaining all the relevant details to their clients. This flaw is leading people to panic, and withdrawing funds from their plans at the worst moment they could possibly do so.
The same had happened in Ocotber of 1987, which is one of the biggest one day collapses recorded in history. Millions of depositors had lost out when two years later the S&P 500 had rose by over 30% .
Furthermore during congress in October, it was recommended that 401k plan managers invest funds in bonds rather than shares. Well thank God this didn’t happen, since by the end of October, the Dow Jones has increased in value by at least 10%.
Things are different in the Austalian continent, where retirees are required to contribute 9% of their salary into their pension plan, and so they stand now with more than enough funds in their portfolio. In the United States, the contribution is on of the lowest in the whole world, as it stands at a mere 3%. So finally the gist of all this is; the 401k plans should be reviewed and fixed, in a way that will benefit both employers and employees.
Reference: http://www.401khelpcenter.com/401k/white_401k_aarp.html
The 401k Plan Reform Recommendations
Ms Theresa Ghilarducci has recently discussed in front of congress, her plans with regards to the future of 401k plans. It seems that she suggests changing the ‘risky’ 401k plans, into more stable government subsidized retirement accounts. What this would do, is make an already flawed system, worse.
Her proposal suggests switching investments in shares, into stable government bonds. Now over a long term, studies show that shares will outperform gains coming from stable government stocks. Also, the fact that contributions are done monthly, will average out the drastic share fluctuations. Ms Ghilarducci’s proposal suggests that if investments underperform in the long run, the plans will then be subsidized from tax money. This makes no sense at all.
Furthermore, had the congress amended the 401k plans, as per Ghilarducci’s recommendations, investors would right now be 10% worse off, since the Dow Jones has made an average improvement by this percentage.
Ghilarducci also proposed that everyone has the same plan, forking out the same $600 contribution. This is nonsense! At least 95% of Americans can easily afford their 401k contributions. The other 5% are probably so poor that anyway when they retire, their pension will be replaced by Social Security.
The 401k plan problems don’t lie with the underlying investments. The problem lies with the employers not matching their 3%. This is already one of the lowest rates in the whole world; even Mexican employers provide greater contribution! We should look at countries like Australia, where retirees will have more money in their pockets since the employer contributes a whopping 9% to the 401k plans.
Well the reform is currently being planned, and let’s hopes that the people who are in charge, will make it a point that our retirement plans will be worth it.
Reference: http://www.401khelpcenter.com/401k/white_donoharm.html
Her proposal suggests switching investments in shares, into stable government bonds. Now over a long term, studies show that shares will outperform gains coming from stable government stocks. Also, the fact that contributions are done monthly, will average out the drastic share fluctuations. Ms Ghilarducci’s proposal suggests that if investments underperform in the long run, the plans will then be subsidized from tax money. This makes no sense at all.
Furthermore, had the congress amended the 401k plans, as per Ghilarducci’s recommendations, investors would right now be 10% worse off, since the Dow Jones has made an average improvement by this percentage.
Ghilarducci also proposed that everyone has the same plan, forking out the same $600 contribution. This is nonsense! At least 95% of Americans can easily afford their 401k contributions. The other 5% are probably so poor that anyway when they retire, their pension will be replaced by Social Security.
The 401k plan problems don’t lie with the underlying investments. The problem lies with the employers not matching their 3%. This is already one of the lowest rates in the whole world; even Mexican employers provide greater contribution! We should look at countries like Australia, where retirees will have more money in their pockets since the employer contributes a whopping 9% to the 401k plans.
Well the reform is currently being planned, and let’s hopes that the people who are in charge, will make it a point that our retirement plans will be worth it.
Reference: http://www.401khelpcenter.com/401k/white_donoharm.html
In Reality, What Are Independent Advisors?
When discussing retirement plans, we normally hear the word independent coming up very often; be it independent consultation, independent brokers and so on. But what does the word independent really mean in relation to plans?
More often than not, you will hear people saying that the have an appointment with an independent advisor. When discussing in more detail, you will find out that this so called independent advisor, is actually employed with a brokerage firm. So is he really independent or is this just a cover? Is the brokerage firm in question deriving any revenue from this advisor’s sales?
Legislation was passed in the 1970’s, which established the regulatory framework that retirement plans should be based upon. The interpretation of the ERSA, has over the years established the fiduciary discretion parameters. One of the aspects that require caution is the choice of retirement plan advisors, making sure they are competent to do the job. This does not mention ‘independence’ from the company.
Conflicts of interest are another matter to consider, and this is where being ‘independent’ enters the picture. Independent should mean that the advisor provides objective advice to his client, without any conflict of interest.
Let’s provide an example. Conflict of interest occurs commonly when a service provider such as a bank, is the 401k plan’s main guidance and support provider, for appropriate investment choices. It is obvious that when making investment choices are being made, the advisors would be somewhat biased. Providers do recognize this issue, and are wary not to give ‘advice’.
Therefore as a conclusion, investment advisors should always retain objectivity when performing their fiduciary function, because conflicts of interest may undermine the client’s rights.
Reference: http://www.401khelpcenter.com/401k/graham_independent.html
More often than not, you will hear people saying that the have an appointment with an independent advisor. When discussing in more detail, you will find out that this so called independent advisor, is actually employed with a brokerage firm. So is he really independent or is this just a cover? Is the brokerage firm in question deriving any revenue from this advisor’s sales?
Legislation was passed in the 1970’s, which established the regulatory framework that retirement plans should be based upon. The interpretation of the ERSA, has over the years established the fiduciary discretion parameters. One of the aspects that require caution is the choice of retirement plan advisors, making sure they are competent to do the job. This does not mention ‘independence’ from the company.
Conflicts of interest are another matter to consider, and this is where being ‘independent’ enters the picture. Independent should mean that the advisor provides objective advice to his client, without any conflict of interest.
Let’s provide an example. Conflict of interest occurs commonly when a service provider such as a bank, is the 401k plan’s main guidance and support provider, for appropriate investment choices. It is obvious that when making investment choices are being made, the advisors would be somewhat biased. Providers do recognize this issue, and are wary not to give ‘advice’.
Therefore as a conclusion, investment advisors should always retain objectivity when performing their fiduciary function, because conflicts of interest may undermine the client’s rights.
Reference: http://www.401khelpcenter.com/401k/graham_independent.html
Saturday, March 28, 2009
Take charge of your 401k Plan
The United States Secretary of the Treasury is encouraging an increase in government regulation on investments such as 401k retirement plans. Mr Geithner suggests that vagueness in various financial instruments is one of the contributing factors, towards the financial crisis that we’re now living.
The 401k retirement plan is a plan that everyone invests in. Unfortunately the values of most 401k plans all around the United States, are currently undergoing a full on nose-dive. This problem started off just recently, since a few years back, the bull market was supporting most companies, even those which were financially unstable.
Since the chapter has turned however, so did the results of such companies, and everyone is now wondering whether the said financial experts, who were investing the people’s hard-earned money into such companies, actually knew what they were doing.
Were the 401k plan managers really considering where they were investing the money? Did these people realize that the future of many retirees was in their hands? Maybe such experts should not have been in charge at all. If the managers were the experts they said they were, they should have realized that a financial meltdown was around the corner.
So at the end of the day, my advice is this:
• Take responsibility of your own 401k plan, and instead of simply relying on what other people tell you, do your own homework.
• Ask or read through your documents, to verify whether you can choose the investment, into which your monthly contribution goes.
• Have a look at the fees you are paying on the plan. Cheaper plans might be available.
• If your company won’t sponsor you plan anymore, you can simply switch plan into something more suitable.
• Finally, consider asking for a financial planner’s advice, to help you analyze your alternatives.
Reference: http://www.bizzia.com/articles/is-it-time-for-better-401k-oversight/
The 401k retirement plan is a plan that everyone invests in. Unfortunately the values of most 401k plans all around the United States, are currently undergoing a full on nose-dive. This problem started off just recently, since a few years back, the bull market was supporting most companies, even those which were financially unstable.
Since the chapter has turned however, so did the results of such companies, and everyone is now wondering whether the said financial experts, who were investing the people’s hard-earned money into such companies, actually knew what they were doing.
Were the 401k plan managers really considering where they were investing the money? Did these people realize that the future of many retirees was in their hands? Maybe such experts should not have been in charge at all. If the managers were the experts they said they were, they should have realized that a financial meltdown was around the corner.
So at the end of the day, my advice is this:
• Take responsibility of your own 401k plan, and instead of simply relying on what other people tell you, do your own homework.
• Ask or read through your documents, to verify whether you can choose the investment, into which your monthly contribution goes.
• Have a look at the fees you are paying on the plan. Cheaper plans might be available.
• If your company won’t sponsor you plan anymore, you can simply switch plan into something more suitable.
• Finally, consider asking for a financial planner’s advice, to help you analyze your alternatives.
Reference: http://www.bizzia.com/articles/is-it-time-for-better-401k-oversight/
Buying Life Assurance? Have a look at this before you leap
You will hear various things coming from the mouths of agents who are trying to sell you some form of life insurance cover. Do a favour to yourself, and don’t believe everything they say. A cash value life policy may at times be a complete waste of money.
This does not however mean that no one requires Life Assurance. For some individuals, Life Assurance is really considered necessary. Here are three specific circumstances, in which an individual would need a specific form of cover:
• Parents of children, who are also the sole or primary source of income for the family, should purchase enough cover that will pay off any outstanding debts, over the children’s college expenses, and leave something for the surviving spouse.
• People who are subject to Estate Tax need to purchase life cover. A guaranteed life assurance policy, inside an insurance trust fund, is the most economical way to transfer wealth.
• The third type of cover is directed towards high income earners. People who find themselves in this category, should opt for a 412i Fixed Benefit plan. More than a life cover, this policy is better described as a retirement plan, than high income earners can opt for, instead of the 401k plan.
This plan, allows investors to make a larger contribution into their plan as opposed to the normal IRAs, and thus reduce the amount of taxable income. This plan is ideal for small business, where the number of employees is 10 or even less. This category includes estate agents, doctors, consultants or small business owners.
The contributions going to a 412i plan may be up to five times bigger, than contributions directed to other types of retirement plans. This would mean that, since the contributions come from pre taxed income, the taxable income value would be reduced, thus saving you tax money. Moreover, this plan will also provide a death benefit to its named beneficiaries, in the event that the life assured dies before reaching retirement age.
Reference: http://resorttown.blogspot.com/2009/03/truth-about-life-insurance.html
This does not however mean that no one requires Life Assurance. For some individuals, Life Assurance is really considered necessary. Here are three specific circumstances, in which an individual would need a specific form of cover:
• Parents of children, who are also the sole or primary source of income for the family, should purchase enough cover that will pay off any outstanding debts, over the children’s college expenses, and leave something for the surviving spouse.
• People who are subject to Estate Tax need to purchase life cover. A guaranteed life assurance policy, inside an insurance trust fund, is the most economical way to transfer wealth.
• The third type of cover is directed towards high income earners. People who find themselves in this category, should opt for a 412i Fixed Benefit plan. More than a life cover, this policy is better described as a retirement plan, than high income earners can opt for, instead of the 401k plan.
This plan, allows investors to make a larger contribution into their plan as opposed to the normal IRAs, and thus reduce the amount of taxable income. This plan is ideal for small business, where the number of employees is 10 or even less. This category includes estate agents, doctors, consultants or small business owners.
The contributions going to a 412i plan may be up to five times bigger, than contributions directed to other types of retirement plans. This would mean that, since the contributions come from pre taxed income, the taxable income value would be reduced, thus saving you tax money. Moreover, this plan will also provide a death benefit to its named beneficiaries, in the event that the life assured dies before reaching retirement age.
Reference: http://resorttown.blogspot.com/2009/03/truth-about-life-insurance.html
Is your 401k plan underfunded?
The problem of underfunding has lately been the topic of the day, and some experts believe that this predicament may evolve and even worsen. It seems that 401k plans are subject to testing that confirms that higher company officers, do not get returns that are better than the ones employees receive.
The economic recession however, may lead some companies to terminate the plans, since they will not be able to afford the plan contributions. This trend has already started, however experts believe that if the recession continues for a certain length of time, the problem will worsen.
Apart from this, it seems that some tight for cash companies, are withholding the employees 401k contributions, and instead of transferring the money into the employee’s fund, they are using it as operational capital.
Employees should take control of their plan by asking for statements, confirming the current balances, and that their contributions are actually being directed to their 401k plan.
From the employer’s side, 401k plans that offer the right features should work as a good tool for employee retention. There are various plans available, that all offer various features and can provide maximum benefit for the employee, accompanied by the lowest funding costs.
Options available are outlined below:
• Safe Harbour 401k plans – These plans are directed to high earning individuals, since they allow the maximum possible contribution, without the risk of failing the ACP test. This is why they are called safe harbor.
• New Comparability Plans – These plans are directed towards companies who would like to retain some form of caution in contribution funding, while amplifying the contributions of owners or high earning individuals.
• Defined Benefit Plans – These plans define the amount of money that individuals will be getting upon retirement age. These plans are better suited for smaller businesses.
Reference: http://www.credit.com/news/economic-crisis/2009-03-24/recession-causing-many-401ks-to-be-underfunded.html
The economic recession however, may lead some companies to terminate the plans, since they will not be able to afford the plan contributions. This trend has already started, however experts believe that if the recession continues for a certain length of time, the problem will worsen.
Apart from this, it seems that some tight for cash companies, are withholding the employees 401k contributions, and instead of transferring the money into the employee’s fund, they are using it as operational capital.
Employees should take control of their plan by asking for statements, confirming the current balances, and that their contributions are actually being directed to their 401k plan.
From the employer’s side, 401k plans that offer the right features should work as a good tool for employee retention. There are various plans available, that all offer various features and can provide maximum benefit for the employee, accompanied by the lowest funding costs.
Options available are outlined below:
• Safe Harbour 401k plans – These plans are directed to high earning individuals, since they allow the maximum possible contribution, without the risk of failing the ACP test. This is why they are called safe harbor.
• New Comparability Plans – These plans are directed towards companies who would like to retain some form of caution in contribution funding, while amplifying the contributions of owners or high earning individuals.
• Defined Benefit Plans – These plans define the amount of money that individuals will be getting upon retirement age. These plans are better suited for smaller businesses.
Reference: http://www.credit.com/news/economic-crisis/2009-03-24/recession-causing-many-401ks-to-be-underfunded.html
Thursday, March 26, 2009
Annual Funding Notice Necessities
The Labour Department of the United States, has recently supplied a Field Assistance Bulletin, which deals with the conformity to the annual funding notice requisite, for defining the various pension plans. This official statement also contains a model of how the notice should be compiled, for the benefit of single-employer plans.
Employers should normally provide the compiled notices, within a specified term of maximum 120 days after the closing of the plan year. Smaller sized plans that are entitled to use an end of year valuation date should provide this notice by the same date that they file the required Form5500.
Pension Plan administrators, are required to provide the above mentioned notice to the following parties:
• all the people who are contributing money into the pension plan
• all the plan beneficiaries
• all the labour organizations that are representing either the beneficiaries or the contributors.
Furthermore, the Pension Benefit Guaranty Corporation should also get a copy of the funding notice, in the case that the plan liabilities are in excess of the plan’s assets, by a sum that exceeds 50 million dollars. The Pension Benefit Guaranty Corporation may also send a written request asking for the notice. In this case, the plan administrators should send the funding notice within 30 days from the date of the written request.
The model version of the funding notice that was issued with the Field Assistance Bulletin is not required, however if properly completed, it will ensure that all the legal requirements are satisfied, until further notice.
Reference:
http://www.watsonwyatt.com/search/parser.asp?ID=20826
Employers should normally provide the compiled notices, within a specified term of maximum 120 days after the closing of the plan year. Smaller sized plans that are entitled to use an end of year valuation date should provide this notice by the same date that they file the required Form5500.
Pension Plan administrators, are required to provide the above mentioned notice to the following parties:
• all the people who are contributing money into the pension plan
• all the plan beneficiaries
• all the labour organizations that are representing either the beneficiaries or the contributors.
Furthermore, the Pension Benefit Guaranty Corporation should also get a copy of the funding notice, in the case that the plan liabilities are in excess of the plan’s assets, by a sum that exceeds 50 million dollars. The Pension Benefit Guaranty Corporation may also send a written request asking for the notice. In this case, the plan administrators should send the funding notice within 30 days from the date of the written request.
The model version of the funding notice that was issued with the Field Assistance Bulletin is not required, however if properly completed, it will ensure that all the legal requirements are satisfied, until further notice.
Reference:
http://www.watsonwyatt.com/search/parser.asp?ID=20826
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