Wealth Management Resource For The Affluent

Wealth Protection: 7 Key Points on Life Insurance as an Asset Class

Charles Massimo — Wed, 30 Nov 2011 17:14:00 GMT

There is an outpouring of explanations that recognize the unique position cash value life insurance can hold in regards to retirement investments. For some it can be a key component regarding wealth protection or even moreso, wealth transfer. Some experts say when designing a portfolio by market capitalization and investment style, cash value and death benefits in a life insurance policy should be taken into consideration. A study by Richard Weber and Christopher Hause titled, “Life Insurance as an Asset Class: A Value-Added Component of an Asset Allocation”, explains several key reasons life insurance should be considered an asset class. One of the studies compared an existing portfolio with permanent life insurance protection to one without it. The portfolio with permanent life insurance outperformed the portfolio without life insurance and was less risky. Here are several key points to bear in mind:

1. Life insurance is a unique asset for its ability to leverage a relatively low annual premium into a scheduled death benefit, delivering timely value at the death of the insured.

2. Permanent life insurance may optimize the risk/reward profile of an investment portfolio. By splitting up life insurance policies among whole life, universal life insurance and variable life insurance Weber adds and other research indicates, a policyholder’s cash value and death benefits will keep pace with inflation. In addition, the policyholder has access to the cash value, as well as increasing death benefits, especially at older ages.

3. A cynical value proposition for the economic value of life insurance would suggest that the sooner you die after acquiring life insurance, the better the “return on investment”. However, buyers of life insurance are usually not as interested in investment return as they are seeking to insure human life value- the economic value of a lifetime of work.

4. Based on two distinct analytical evaluations used to answer the question, “which policy should I buy”, to cover a lifetime insurance need, universal “no-lapse guarantee” and participating whole life demonstrated the best value with the least market risk.

5. The variety of life insurance products, together with the difficulty of making appropriate cost/benefit assessments, presents confusing choices to consumers.

6. Permanent life insurance may be considered as any other major asset class and both acquired and managed according to an asset allocation for long-term value and maximization of benefits. In fact, consumers may wish to consider paying premiums from portfolio resources rather than from income resources.

7. Research shows that life insurance as an asset class can act as a hedge against the loss of human capital.

It’s not about portfolio investments or life insurance per se, but more about a synergy of assets that can produce more legacy value, potentially more net return and less market value adjustment risk. Weber suggest that “Life insurance may deliver greater legacy and living values in conjunction with the investment portfolio- for a given risk tolerance and reward goal- than a portfolio without life insurance”. When developing a comprehensive wealth management plan focused on wealth protection and wealth transfer, including life insurance as an asset class should be considered.

Comprehensive Wealth Management: The Distracted Investor

Charles Massimo — Tue, 29 Nov 2011 17:57:00 GMT

It goes without saying that we have always adhered to the fact that the media bombards investors on a daily basis with financial news and information. Investors who are not receiving the proper guidance from their advisor may begin to feel anxious and worried. This can drive committed investors to stray from their comprehensive wealth management strategy and instead allow noise and hype to control their decisions, forgetting that diversification and discipline can weather market volatility and clamor.

An article in the New York Times on Saturday titled, “The 50-50 Solution”, begins by describing how investors have a tendency to switch back and forth between two ideologies when markets are volatile. The first course of action is to seek safety and avoid risky assets such as stocks. The second option is to jump completely into stocks and ride the big rally. Unfortunately, choosing either of these selections can be costly to an overall wealth management plan, yet both of them have received overwhelming support. The point that the writer is trying to make is that you have two completely opposing views based off the same information. Who’s right? It’s all in the interpretation. The point he does make is this, “It may be hard to decide which picture makes the most sense. Perhaps each is appealing, sometimes one more than the other, depending on the news of the particular moment. These days, paying close attention to the economy and the markets can cause whiplash. What should an investor really do? In a word, nothing”.

As an investor, it’s hard to understand the notion that investment performance is irrelevant. It really has no significant bearing on the long-term, real-life return of people. What does, however, is your own behavior. During volatile times such as these, many investors make the mistakes that will significantly impact their financial future.

A study done by Vanguard called, “Recessions and Balanced Portfolio Returns”, tracked the stock and bond markets using indexes that mirror the broad markets. Individual stock and bond selection wasn’t involved at all. What the study found was when the economy was bad and when it was good, the portfolio performed more or less the same. It really didn’t matter. “But the results suggest that as investors, rather that try to time the market, most people are best off with a diversified portfolio and just sticking with it over the long run.” Bottom line is diversification and discipline are vital and no one should assume they know better than the overall market. “If you have a diversified portfolio and are prepared to hold on to it, you may not need to know where the economy is going.”

Controlling emotion is one of the hardest if not the hardest thing to do when it comes to maintaining a wealth management plan. Financial noise can cause even the most disciplined individual to doubt their tactic. With radio, TV, the internet, newspapers and the like constantly reporting about market swings, losses and gains, economic data, political turmoil, and the world as a whole, take the noise for what it truly is…nothing but a widespread and dangerous distraction.

Dimensional Fund Advisors: Noisy October, Noisy November

Charles Massimo — Wed, 23 Nov 2011 14:00:00 GMT

Below is a recent article by Jim Parker, a VP at DFA Funds, that reiterates my position that trying to time the market is a costly waste of time. The best thing an investor can do is remain disciplined and stick to their existing plan. Ever noticed how gamblers always tell you about their big wins, but tend to keep their even bigger losses close to their chests? People who seek to finesse their entry and exit of financial markets are similar.

Going awfully quiet in recent days have been the analysts who a month ago were saying that was the time to get out of risk assets. It seemed a good call at the time as global stock markets had suffered their worst quarter in nearly three years. Pummeling confidence were a host of concerns, including the European sovereign debt crisis, signs that global growth was stalling and a general lack of confidence in policymakers to take effective action to avoid another recession. One chartist quoted by Dow Jones said the US market was breaking down in what could be a very nasty prelude to the fourth quarter. The advice from the technical analysts was that investors needed to be extremely wary buying stocks in October.

Adding to the nerves were the now routine reminders to investors about October supposedly being the "scariest" month for shares, with two of the biggest crashes in history occurring in the 10th month of the year–in 1929 and 1987. Now while further volatility may well still lay ahead, those who took that advice and bailed out of risky assets at the end of September might now be ruing their decision. The US S&P-500 rose by nearly 11 per cent in October, its largest monthly rise since 1991. That was the year that dance act 'C&C Music Factory' was topping the pop charts and 'The Silence of the Lambs' won Best Picture at the Academy Awards.

But it wasn't just a US story. The MSCI All-Country World Index rose by 10 per cent in October in US dollar terms, its largest one-month rally since April, 2009. In Australia, the S&P/ASX-200 gained 7.2 per cent in local currency terms, its best one-month performance since July, 2009. What's more, among the biggest gaining sectors in October were financials, energy and materials sectors, which had all lagged in the defensive mood of the prior months.

These are significant upward movements and will have eased some pain for investors after five-to-six months of consecutive decline in equity markets, but not if you had listened to the advice of some of the Jeremiahs in the financial media.

It's not often appreciated by ordinary investors that markets are forward looking. We know the news has been bad, but it's what comes next that counts. Selling out after a bad run in the markets just means you turn paper losses into real ones and leave yourself with the extremely difficult challenge of finessing your re-entry point. The reversal of direction in October highlights this difficulty.

We don't know if these October gains are sustainable — and already in November, sentiment aroundEuropehas turned sour again. But we do know that markets can move quickly and respond to new information instantaneously. That's why market timing is so hard and why the best approach is to maintain your chosen asset allocation–with periodic rebalancing–irrespective of the week-to-week and month-to-month noise. Get earplugs and turn off the TV! You’ll thank me for sure!

401k Hidden Fees: Hide, and Seek 401k Lawsuits

Charles Massimo — Tue, 22 Nov 2011 14:15:00 GMT

It’s no secret that company 401k plans can be overwhelmed with excessive, hidden fees. Recent 401k lawsuits have focused on employees claiming their 401k plans were mismanaged and too costly. Even Ameriprise is currently being sued by their employees!

I was recently featured in a Long Island Business News article,” Retirement Account Hide and Seek”, that discussed various 401k hidden fees that can truly devastate any retirement savings effort. According to the Department of Labor, an employee with a 401k balance of $25,000 and 35 years until retirement will grow their account balance to $227,000 with a 7% rate of return and with fees of .5 or half a percent. If you increase the fees by a percentage point to 1.5% while making no further contributions, than that same employee’s balance will drop to $163,000 at retirement. That’s a 28 percent difference.

Even more important is the responsibility of plan sponsors, business owners or plan administrators. It is up to these individuals to know the costs associated with the company plan and ensure employees are not victims. In fact, if a plan trustee is unable to justify all of the fees in their plan, the DOL can levy fines up to 20% of plan assets. That doesn’t even include the 15% excise tax the IRS can impose for prohibited transactions.

Just last week it was announced that two BNY Mellon employees are suing the company alleging breach of fiduciary duty in the management of the 401k plan and ESOP. The suit alleges that actions by BNY Mellon and certain senior officers caused, “the loss of millions of dollars of participants’ retirement savings”. There are currently only 2 plaintiffs, but remember, it only takes one person to file a class-action suit. The suit goes on to allege that BNY Mellon, “made a series of false and misleading statements and omissions regarding the exchange rates the company used in connection with trades relating to foreign-exchange transactions. The lawsuit goes on to state that those forex transactions adversely affected the value of the BNY Mellon stock holdings in the benefit plans. But here’s the key point: BNY was accused of, “failing to provide complete and accurate information to plan participants” in regards to the company’s foreign-exchange transactions. The lawsuit went on to charge the company of “continuing to offer BNY common stock as a plan investment option and permitting the 401k and ESOP plans to buy and hold shares of BNY common stock when it was imprudent to do so.”

What do you think the outcome will be when 72 million plan participants, many of which thought they were paying nothing in retirement fees, find out not only are they paying fees, but they are paying excessively high fees because the plan sponsor or business owner didn’t take the time to truly know all the costs involved? As the plan sponsor, plan administrator, even if you sign the form 5500, you have an inherent obligation to try to provide the best possible plan for employees. It’s worth the extra effort on your part to ensure service providers aren’t abusing their position. There has been an overflow of information supporting the fact that 401k hidden fees are real and detrimental to any retirement plan. Take the initiative and at least have your plan evaluated by an independent third party. Your employees will thank you for it!

Wealth Management: Inflation Fear Factors

Charles Massimo — Thu, 17 Nov 2011 16:03:00 GMT

When inflation spikes, the natural inclination is to panic and immediately change investment strategies. Given the glut of information available to investors by the hour–from newspapers and television down to blogs on the Internet–it is easy to see why fear and hysteria can manifest and cloud better judgment. However, investors need to remain disciplined and tune out the noise when it comes to developing a comprehensive wealth management plan. Indeed, when inflation crests, misinformation and alarmist reporting will evoke emotions. These emotions can lead to hasty investment decisions that are likely to further impede purchasing power and put assets in harm’s way. Instead, plan ahead for the inevitable and build prudent asset protection strategies with inflation well in mind.

A recent Thrivent Financial for Lutherans survey of 2,000 American adults found that 93 percent of all respondents reported they worried at least “a little” about inflation’s impact on their retirement finances and 53 percent said they worried “a lot.” Ronald Reagan, our 40^th President said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”. Also remember, there are a host of individuals and companies who benefit from freaking people out about inflation. The media contributes too!

When gas prices are $4.00 per gallon, it leads the news. In periods when energy prices fall, few outlets run features on the plummeting price of gasoline. It’s easy to notice the price of things that are going up — especially gasoline, which people purchase frequently and whose price is loudly and publicly advertised. When prices of goods and services stay the same, or fall a bit, or deliver a higher value for the same price, it’s not news. As an example, think of toys, cars, computers, or internet access — it frequently doesn't register with investors. People, being human, are prone to emotion. This emotion becomes detrimental when you base your investment decisions on emotions or change a well, laid investment strategy based on emotions or fear. People feel the pain of paying higher prices much more acutely than they notice the pleasure of prices of other things falling or remaining stagnant. And so they tend to accentuate the negative and eliminate the positive when it comes to their assessment of whether life is getting more expensive. Regardless, the fear of higher inflation shouldn't simply be ignored or downplayed, especially at a time of weak labor markets and stagnating wages. It shouldn’t rule your every thought and action either.

The fear of inflation is always with us and should be a consideration as part of any wealth management plan. However, instead of being a hawk or a dove on inflation, investors we should play chicken. This means having a healthy fear of the consequences of inflation, but not going crazy at every headline! (that just makes you a headless chicken or can drive you really nuts if you are like Chicken George).

401k Lawsuits: 14 More Cases and Counting ! Part 2

Charles Massimo — Tue, 15 Nov 2011 14:23:00 GMT

As year end approaches, many are sure to breathe a sigh of relief since the enforcement date for new Department of Labor fee disclosure regulations was postponed from January 1, 2012 until April1, 2012. The first part in our series, 401k Lawsuits: DOL Enforcement Actions are for Real!, showed 10 instances where the DOL has sued firms regarding their retirement plan. Here are an additional 14 cases! The idea isn’t to scare you or instill fear, but more so to create an awareness of the range of existing 401k lawsuits and the possibilities to come once 408(b)(2) and 404(a)(5) take effect. Stay ahead, get an independent review and save yourself the time and headache.

1. DOL Obtains Order Against Ohio Company to Restore More Than $37,000 to 401k

2. Labor Department Sues Michigan Company and Owner to Restore More Than $16,000 to 401k

3. Labor Department Sues Trustee of Rhode Island 401k to Restore Employee Contributions

4. Judges Orders Company to Terminate 401k and Distribute Funds to Participants

5. DOL Sues Georgia Software Services Company to Restore Losses to 401k

6. Judge Orders Hoosier Foot & Ankle Owner to Restore $18,000 to Company 401k

7. Labor Obtains Consent Judgment Requiring Former Company President to Restore Assets to 401k

8. Labor Department Sues Virginia Beach, VA, Company for Failing to Forward Employee 401k Contributions

9. DOL Sues Chicago-Area Investment Firm to Recover More Than $1 Million for Five Pension Plans

10. Department of Labor Sues Minneapolis Firm That Abandoned 401k Plan After Ceasing Operations

11. DOL Obtains Judgment Restoring $18,000 to Burnsville, Minn.-based Slate Cement's Health, Dental and 401k Plans

12. Labor Department Action Recovers Nearly $52,000 from Trustees of Premier Properties USA 401k Plan

13. DOL Obtains Judgment Requiring Repayment of $1.25 million to Defunct Florida Health Care Company's 401k

14. DOL Sues Wisconsin Company and President to Recover More Than $1.3 Million for Company's Profit-Sharing Plan

The fact of the matter is, though these new rules will ultimately benefit plans, they will increase the burden of accountability for employers and also increase the workload for HR professionals. To avoid becoming the target of 401k lawsuits and regulatory sanctions, companies must act now to make the extensive preparations necessary to deal with the new DOL rules.

Comprehensive Wealth Management: What Women Want from an Advisor

Charles Massimo — Fri, 11 Nov 2011 19:46:00 GMT

Finding the right financial advisor for women is more challenging than one might suspect. Despite their need for a comprehensive wealth management plan, a real obstacle for women’s greater understanding and management of their financial matters is the treatment they receive from many financial advisors. In a Boston Consulting Group study, 55% of its affluent respondents said that private banks are not giving women the attention they need. The women specifically said that the banks give men more attention, as well as better advice, deals and terms and all but ignore them when they are meeting as part of a couple – even when the woman is making the financial decision. That is a pretty harsh criticism which is levied by women in multiple scenarios. And, it gets worse. A majority of women don’t trust their financial advisors.

In a Spectrem Group survey, 98% of women with a net worth ranging from $100,000 to $25 million said that trustworthiness was the most important criteria for selecting a financial advisor, however, they are leery of advisors, even more so now in the aftermath of the Madoff fraud. The financial advisors who women seek out are those who win their trust with integrity, responsiveness, and attention to the values women hold for their financial/retirement planning. For a woman, letting her know that her portfolio will be able to support her children’s college education or grandchildren’s education is much more meaningful than simply telling her how well her portfolio is performing. Women also respond to advisors who are open and honest with them regarding the challenges they will face such as outliving their spouses, being a caregiver for both their families and parents (i.e., the sandwich generation), and potentially requiring long-term care.

Women (as confirmed by the Boston Consulting Group study and others) want a level playing field from financial advisors and an approach that is tailored to them. According to the Boston Consulting Group study, women want empathy, trust and customized advice versus men who view their financial advisor/wealth manager relationship more in the context of a business relationship.

For women, in addition to being empathic and trustworthy, a financial advisor must be approachable and responsive to their needs. This also extends to their children. Women expect their financial advisors to build a good rapport with their adult children in order to provide continuity as wealth is transferred between generations. When women who participated in the GenSpring “Women & Wealth” survey were asked what the top five characteristics they seek in a wealth advisor, “financial expertise” (72%) and “investment expertise” (71%) were the top two preferred characteristics with “trust” placing third (70%). “Trust,” however, was the characteristic which received the most first mentions of any trait with 35% compared with 17% for “financial expertise” and 22% for “investment expertise.” Ranking fourth and fifth were “communication” (61%) and “estate planning expertise” (46%), which were mentioned first by 4% and 7%, respectively.

The development of a comprehensive wealth management strategy requires not only trust but communication between the advisor and the potential client. It requires a sound discovery process that makes the client feel comfortable revealing not only financial goals, but their hopes, dreams and aspirations for the future. Remember, the right financial advisor for you will always put your needs and interest first ahead of their own pockets!

Fiduciary Liability: Top 10 401(k) Prohibited Transactions

Charles Massimo — Thu, 10 Nov 2011 13:05:00 GMT

We are probably one of the most vocal firms in the area when it comes to creating an awareness of upcoming Department of Labor Regulations and how they will affect 401k plans. Many plan sponsors, business owners and plan trustees fiduciary liabilities’ will increase as plan participants become aware of excessive fees, lack of due diligence and mismagenemgent on the part of those fiduciaries. As of April 1, 2012, the Department of Labor will have a field day identifying those companies whose plans are not compliant subjecting those plan’s fiduciaries to fines, fees and maybe even a DOL audit that could ruin a small business. Aside from excessive, hidden fees, prohibited transactions can also trigger a DOL investigation into a company’s 401k plan.

ERISA and IRS code state that prohibited transaction rules apply not only to obvious situations, like embezzlement or blatant misuse of plan assets, but also to situations that might be less obvious. Examples may be paying persons who perform little or no actual services or loaning money to a financially troubled sponsoring employer. With that being said below is my top 10 prohibited transactions in a 401k. Please note that number one is actually the most common!

1. The broker is the CEO’s golfing buddy

2. Plan uses Retail, Active funds rather than Passive Institutional

3. Employee statements’ allocated gain/loss not compared to Lipper

4. The Plan has no IPS

5. Plan is not regularly shopped (~3 years)

6. Plan Sponsor accepts vendors’ gifts >$250

7. Brokers never asked the ten COI questions by DOL

8. Plan has no written monitoring procedures

9. No DOL Fee Disclosure

10. No ERISA Budget Account

Many of the ordinary transactions in which a plan must engage are prohibited transactions such as contracting for administrative services. However, generally, there are exemptions that provide relief for these ordinary business transactions. The prohibited transaction rules prohibit fiduciaries from entering into transactions with parties that have a significant relationship with the plan. ERISA uses the term “parties in interest” to describe plan-related persons who are prohibited by ERISA from entering into transactions with the plan; the IRS uses the term “disqualified persons” to describe plan-related persons whose actions may result in excise tax penalties that are cumulative and have no statute of limitation. I’ll address each of these prohibited transactions in a follow-up piece so business owners, plan sponsors, trustees and HR professionals can begin taking the necessary steps to reduce their fiduciary liability.

Dimensional Fund Advisors: A Steady Hand for Advisors, Part 2

Charles Massimo — Tue, 08 Nov 2011 13:15:00 GMT

Here’s the second part of the DFA article that focuses on the need for discipline when it comes to investing. If you allow fear and emotion to drive your investment decisions, the outcome could devastate your portfolio. Recent history illustrates why the average fund investor may fail to earn returns comparable to those of the average fund or market index. Markets change quickly, and investors must be in their seats to capture returns. Unfortunately, many investors let their emotions get in the way of participating in long-term market performance.

Quarterly Equity Mutual Fund Flows

Industry vs. Dimensional Relative to S&P 500 Index Performance

January 2008–June 2011

Now consider the upward-sloping blue line, which plots quarterly net flows into equity strategies offered by Dimensional Fund Advisors. These flows were cumulatively positive throughout the entire period, suggesting that shareholders in Dimensional's funds continued to purchase shares during the 2008–2009 market decline and after the March 2009 rebound. As a group, these investors did not flee stocks en masse. In fact, they did the opposite by adding to their portfolios. Their discipline positioned them for the market rebound.

A mutual fund's net cash flows also may reveal the collective discipline—or lack of discipline—among its shareholders. In fact, the direction of net flows can impact portfolio management and performance, especially for funds invested in less liquid markets. Large net redemptions typically increase the direct and indirect costs of a mutual fund, which compromise fund returns. Direct transaction costs include commissions, bid-ask spreads, and price impact incurred when a fund makes trades in response to shareholder redemptions. Net outflows also may generate indirect costs on a fund by forcing its manager to alter the target asset allocation or make disadvantageous, uninformed trades to raise cash. See Qi Chen, Itay Goldstein, and Wei Jiang, "Payoff Complementarities and Financial Fragility: Evidence from Mutual Fund Outflows" (white paper, February, 2007).

Mutual funds typically meet a redemption based on the NAV at day's end but may execute a trade to raise cash on the following day. The redeeming shareholder cashes out at an NAV that does not reflect the trade, and the resulting costs are borne by remaining shareholders. See: "On the Run: Examining Patterns in Mutual Fund Redemptions," Knowledge at Wharton, http://knowledge.wharton.upenn.edu/article.cfm?articleid=2133, accessed September 27, 2011. Therefore, consistently positive net cash flows are helpful to a fund's expenses, strategy, and performance.

In conclusion, the large net cash outflows from US-based mutual funds since 2008 document investor reaction to market volatility, while Dimensional's stable and positive net fund flows suggest disciplined behavior. So why would shareholders in Dimensional's funds behave differently? One reason might be the education, encouragement, and discipline offered by their financial advisor at that difficult time, underscoring the value of sound investment advice.

Retirement Income Planning & Inflation

Charles Massimo — Thu, 03 Nov 2011 13:05:00 GMT

The biggest challenge for a retirement-minded investor is determining if they have planned and funded enough to get them through particularly rough inflationary times. Retirement income planning usually involves the big question,” Will my money last?” Certainly, common contingency plans like downsizing properties and selling businesses can supplement gaps caused by inflation. But, amid so much economic volatility, what else can today’s investor to do?

The U.S. Bureau of Labor Statistics noted that $1 in 2001 had the same buying power as $1.25 today (2011), according to the bureau’s CPI Inflation Calculator. Twenty years ago that dollar had the buying power of $1.62 today, and 30 years ago it had the buying power of $2.43 today.

Now is the time to think about the impact inflation might have on your purchasing power as you plan for retirement , or even if you are already a retiree. It is never too late to change your retirement plan and begin to enact strategies and tactics to keep inflation from crimping the retirement lifestyle you deserve. Ensuring a comfortable retirement in today’s volatile business, investment, and inflationary climate is not always easy, but it is possible. By carefully analyzing your available assets and resources, and making strategic adjustments in the types of investments you own, you can both preserve your hard-earned assets and have the retirement income stream and purchasing power that meets, and perhaps even exceeds, your needs. Make sure your current advisor keeps you aware of how much you will comfortably be able to spend each year, simple ways to pay less taxes and have more living money, and helps you develop strategies to maximize your income streams. A comprehensive retirement income plan will address all of these issues and more.

401k Lawsuits: DOL Enforcement Actions are for Real! Part 1

Charles Massimo — Tue, 01 Nov 2011 10:30:00 GMT

You should be preparing in 2011 for the new DOL fee disclosure regulations. With the recent final ruling on investment advice, the continued concern with hidden fees in 401k plans, and the fact that next year the DOL may begin to target companies that have remained complacent in their efforts to provide a better 401k plan, over the next several weeks, we’ll highlight articles showing DOL enforcement actions. Under ERISA, the U.S. Department of Labor has the authority to conduct civil and criminal investigations to protect 401k plan assets and participants. The Labor Department regularly exercises this authority. Aside from 401k lawsuits, plan sponsors, business owners and trustees need to be aware of the consequences of a DOL investigation or audit as well. Below are 10 examples.

1. DOL Sues Company and President to Restore Employees' 401k Plan Contributions

2. DOL Sues Company and Owners to Restore More Than $14,000 to 401k Plan

3. DOL Obtains Judgment to Restore Assets to Employee Benefit Plan of Defunct Calif.

4. DOL Sues Illinois Company to Restore More Than $31,000 to 401k Plan

5. DOL Sues Texas Company and Owner to Recover Workers' 401k Contributions

6. Labor Department Sues North Carolina Company to Recover Assets for 401k Plan

7. DOL Sues Company to Restore More Than $135,000 to Company's 401k

8. DOL Sues Trustee of Defunct Company to Recover Profit Sharing Plan Assets

9. Labor Department Sues Wisconsin Company to Recover 401k Contributions Plus Lost Interest

10. Company to Restore Nearly $243,000 to Two Pension Plans

The articles above show the Department of Labor’s willingness to step in and protect plan participants. New disclosure regulations don’t go into effect until April 1, 2012 so you can imagine how enforcement action cases will increase once the DOL begins to enforce the new disclosure laws. The combination of recent DOL enforcement actions as well as the increase in 401k lawsuits should signal plan sponsors to be proactive in protecting themselves. One of the first steps that should be taken is having an independent review by an unbiased third party firm to ensure the reasonableness of all fees. Begin preparing now so you can avoid complications next year.

Dimensional Fund Advisors: A Steady Hand for Advisors, Part 1

Charles Massimo — Thu, 27 Oct 2011 12:40:00 GMT

There's no denying the effect of emotions and the fear factor when it comes to investing. Here’s a great DFA piece featured in two parts, that reinforces the ramifications of allowing emotions and fear to control your investment decisions. Since 2008, economic uncertainty and market volatility have tested the staying power of investors around the world. Many people fled equities during the worst months of the global financial crisis, while others waited for signs of a turnaround before investing more. Their emotional reactions may have exacted a large price on their wealth.

The graph below documents investor behavior during the stock market downturn in 2008 and subsequent market rebound. It offers a few key lessons about investing in turbulent markets.

Quarterly Equity Mutual Fund Flows

Industry vs. Dimensional Relative to S&P 500 Index Performance

January 2008–June 2011

Please realize that the graph is for illustration purposes only. Industry net new cash flow data for US-domiciled equity funds is provided by Investment Company Institute ©2011. Quarterly cash flows are estimates that are adjusted to represent industry totals, based on reporting covering 95% of industry assets. Dimensional's figures are based on net new cash from financial advisors in US-domiciled funds. Industry and Dimensional data reflect investment in US and international equity markets and do not include funds of funds. S&P 500 Index performance is based on monthly returns data. The S&P data are provided by Standard & Poor's Index Services Group. The S&P 500 includes 500USstocks chosen for market size. Past performance is no guarantee of future results.

First, look at the shaded graph in the background, which plots the performance of the S&P 500 Index (measured by growth of a dollar) over this three-and-a-half-year period. The market began falling in late 2008 and hit bottom in early March 2009. It then reversed sharply and began a long climb through June 2011.

Now consider how mutual fund investors responded to the stock market's downturn and recovery. The orange line plots quarterly net cash equity flows for theUSmutual fund industry over the same period. (Net cash flow is the difference between redemptions and purchases of shares in a mutual fund. A net cash outflow occurs when redemptions exceed purchases.) Equity fund flows were cumulatively negative over the period. Investors were redeeming more shares than they were buying, and on a net basis, capital was leaving mutual funds. Remember, Mutual fund investors redeem their shares by selling them back to the mutual fund and receiving cash proceeds based on the net asset value (NAV) of the shares at day's end. Redemption is a normal activity in a mutual fund, and liquidity is one benefit of owning fund shares. A fund manager may use inflowing cash to cover the redemptions or keep cash in a "liquidity reserve" for this purpose. When cash balances do not suffice, the manager may execute trades to raise the cash.

Note that these fund industry outflows followed the stock market downturn, and net flows stayed negative even after the market rebound. Investors were reacting to the falling stock market by either redeeming their fund shares or delaying the purchase of additional shares. According to the Investment Company Institute, mutual fund flows do not offer a good measure of total demand for equities since funds hold only about 20% of the total USequities outstanding, with the balance held directly by individuals, institutions, and governments. Academic research offers some evidence that mutual fund flows do not drive market returns but reflect investor reaction to markets. (Roger M. Edelen and Jerold B. Warner, "Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns," Journal of Financial Economics 59, no. 2 (2001): 195–220.) When the stock market suddenly rebounded in March 2009, investors who had reduced their exposure to equities missed a good part of the recovery.

This apparent lack of discipline is well established over longer time periods too. Industry analyses and academic research suggest that investors tend to focus on recent performance and make decisions that compromise long-term returns in their portfolio. A Morningstar study compared the dollar-weighted returns of the average investor in a fund with the fund's published total return for the ten-year period ending Dec. 31, 2009. In US equities, the average investor in all funds earned 0.22% annualized, compared with 1.59% for the average fund. (Russel Kinnel, "Bad Timing Eats Away at Investor Returns," Morningstar.com, February 15, 2010.) Lack of investment discipline also is documented among individual investors who hold common stocks directly. Those who trade frequently pay a tremendous performance penalty for their actions. (Brad M. Barber and Terrance Odean, "Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," The Journal of Finance, April 2000.) Make sure to come back and review the second part of this series.

Wealth Protection: Safeguard Against Inflation

Charles Massimo — Tue, 25 Oct 2011 12:00:00 GMT

Much like high blood pressure is the human body’s “silent killer”; it is equally true that inflation is just as stealthily deadly to your retirement savings and wealth protection efforts. If not dealt with over the long term, it will most assuredly sneak up and deliver a fatal financial blow. Indeed, if your nest egg is not earning enough to stay ahead of inflation and taxes, your retirement lifestyle is likely to get scrambled well ahead of its time.

Inflation is a direct increase in the prices of goods and services over time. Because of such increases the purchasing power of a consumer or business is adversely impacted, requiring they pay more for the same amount and quality of goods or services that they might have paid less for previously. A recent article in Fox Business titled, “Producer Prices Make Largest Increase in 5 Months”, states that producer prices rose more than expected in September, the biggest gain in 5 months, due to recent surging gasoline prices. Just think, in 1990, the average cost of a gallon of gas was $1.34 per gallon, and a loaf of bread was just 70 cents.

Whether retired or not, no one wants to be forced to alter their lifestyle- particularly one where the fruits of their lifetime labor are at stake: relaxation, travel, entertainment and other rewards of a life well-lived. When inflation starts to outpace a retirement portfolio, that comfortable lifestyle is at risk.

When it comes to investing for retirement, accounting for inflation is nothing short of critical to your success – and to maintaining your desired lifestyle along the way. This does not mean taking on an inappropriate amount of risk by chasing high returns and, in effect, gambling with your retirement savings or covering unforeseeable needs with insurance policies. It is about finding the appropriate blend of risk and return necessary to maintain short-term purchasing power in working toward your long-term goals. Remember when it comes to retirement savings and wealth protection, inflation can be like high blood pressure; you don’t see it, but it will kill you!

Avoid 401k Lawsuits: Final Rule Issued on 401(k) Investment Advice

Charles Massimo — Mon, 24 Oct 2011 19:36:00 GMT

Today the US Department of Labor issued its final rule, “to expand access to personalized investment advice for workers in retirement savings plans”, according to Phyllis Borzi, Assistant Secretary of Labor. The rule will spell out allowable scenarios for giving investment advice to 401(k) participants without being subjected to prohibited transaction rules. This comes on the heels of a 401k lawsuit against Ameriprise as their own employees filed a lawsuit against the firm for offering Ameriprise funds in their 401(k) plan. Employees are seeking at least $100 million in losses and a recouping of costs because the financial-services company favored its own underperforming funds as opposed to other more appropriate, lower costing funds.

According to Marcia Wagner, a managing partner at The Wagner Law Group, “Investment providers may have a conflict of interest when it comes to giving participant-level advice because of their variable compensation, which means they may have incentive to steer investors to funds with higher fees. The rule allows for providing investment advice under 2 circumstances: if they use a computer model to pick the investments that has been certified by an independent third party and is unbiased or through an advisor paid a “level” or flat fee whose fees do not change based on investment choices.

The rule was proposed because the Employee Benefits Security Administration noted that it, “continues to believe that 401k DC plan participants and IRA beneficiaries often make costly investment errors”. All this is in an effort to safeguard against advisor self dealing since it seems that almost 90% of 401k lawsuits that have surfaced are regarding hidden fees, excessive fees, revenue-sharing and use of retail funds. All of which usually benefit the pocket of advisors, insurance agents TPAs and record keepers on the plan if not closely monitored. Essentially most of these lawsuits stem from the investment menu portion of the retirement plan and could have been avoided if the investment advisor placed the interest of plan participants ahead of their own. Most of these plans probably could have circumvented a 401(k) lawsuit by having their plan evaluated by an independent firm for excessive or hidden fees at least once every 3 years( that’s the minimum) which is recommended by the DOL.

According to the Wagner Law Group, remember, if a firm is hit with a prohibited transaction, they are subject to a “first tier”15% excise tax on the amount of the prohibited transaction. If the failure is not corrected, the 15% excise tax is imposed again in each subsequent year. A “second tier” 100% excise tax is also imposed if the prohibited transaction is not corrected by the time of the IRS assessment of the excise tax. For example, if the IRS assesses an excise tax on an outstanding prohibited transaction in “year 3”, the cumulative excise that would be 145% of the amount involved in the prohibited transaction. (15%+15%+15%+100%=145%), plus any applicable interest and penalties. The DOL can also impose a fine of 20%. The rule goes into effect in 60 days, meaning the regulation applies to those who are fiduciary investment advisers as of Dec. 27, according to the Labor Department. Will your firm’s current 401k investment advisor make the grade?

Comprehensive Wealth Management Process for Women

Charles Massimo — Thu, 20 Oct 2011 18:05:00 GMT

An independent financial advisor will guide a woman in the development of a sound investment strategy and wealth preservation plan using a comprehensive wealth management process. It begins with a discovery to determine the woman’s personal values, goals and financial requirements. Through this process, the advisor will identify the woman’s assets and financial resources, tolerance for risk, tax exposure, family dynamics, and retirement plan. The advisor’s goal is to develop a plan that will effectively: manage the woman’s financial resources (e.g., savings, retirement accounts, etc.); minimize tax consequences; preserve personal savings; fund needs such as children’s college education, special needs children’s care, long-term healthcare, retirement and charitable giving; and encompass essential estate planning for wealth transfer to heirs. This plan is monitored on an ongoing basis and modified to address changes in thewoman’s personal situation and related goals.

As for the investment component of the plan, an astute advisor will recognize the value in the historically-proven disciplined, passive approach. This approach relies on a balanced, truly diversified portfolio and a philosophy which allows the market to work for his/her clients, rather than foolishly trying to outsmart the market with active selling and buying of stocks. For women, who want their plan to focus on their long-term goals, financial security and life needs, a disciplined investment approach is very reassuring and helps build the trust they seek in their financial advisors. In effect, the right financial advisor will serve a woman and her family as their personal Chief Financial Officer (CFO – a trusted member of the woman and her family’s team helping to provide for their financial well-being and security.)

The right advisor makes all the difference in the world. This is particularly true when an event such as a divorce, illness or death occurs in a late stage of life and being unprepared financially could have devastating results. The last thing any woman should have to face at a time when they are already coping with a divorce, a spouse’s death or diagnosis of Alzheimer’s, cancer or other disabling medical condition, etc. is that they will not have the funds they need to live or address their loved one’s medical needs. Even the idea that they will now have to assume the full financial responsibility can be terrifying for women who are financially-illiterate and unprepared. With a trusted financial advisor by their side, women facing a major life transition can properly address their changing circumstances with confidence that their assets are being protected and they have a comprehensive wealth management process in place.

401k Lawsuits: Top 10 Conflicts of Interest

Charles Massimo — Wed, 19 Oct 2011 14:37:00 GMT

The increase in consulting work and the overlapping of arrangements among investment advisors, service providers, insurance companies, brokers, payroll firms, benefit firms, etc. greatly amplify the possibility of conflicts of interest in a 401k plan which can lead to a 401k lawsuit. A study by the Government Accountability Office (GAO) found an assortment of 401(k) service providers recommend investments that may not be in the best interests of retirement plan participants. Here are 10 conflicts of interest that could greatly reduce retirement savings efforts for plan participants and lead plan sponsors to a 401k lawsuit.

1. Miseducation. Companies can highlight their own funds as examples of investment options under each asset class through investor education, even when they have a financial stake in the outcome of participants’ investment decisions. Investment advice is required by law to be in the plan participant’s best interest; however investment education is not subject to this standard.

2. Bundled funds. A service provider that offers its own investment funds or has an affiliated brokerage arm has an incentive to steer 401(k) plan sponsors to select these proprietary funds, even if other funds from different providers better suit the needs of the plan.

3. Excessive use of annuities. Insurance companies have been known to provide annuities or guaranteed investments that are overrun with excessive, hidden fees in a bundled package making it almost impossible to uncover the true cost of the instrument.

4. Biased advice. A service provider with a conflict of interest may steer 401(k) plan sponsors toward investment funds that increase the service provider’s compensation.

5. Who’s the fiduciary? Many service providers structure their contracts with 401(k) plans to attempt to avoid meeting one or more of the five parts of the current definition of a fiduciary. More importantly, some service providers claim to be a fiduciary when in actuality all of the liability is on the plan sponsor. Also, sometimes 401(k) plan sponsors rely on consultants and other service providers to assist them in asset management, who may or may not be fiduciaries and required to act in a retirement saver’s best interests.

6. Sign up rollovers. Conflicts of interest also arise when 401(k) service providers sell other products and services, such as IRA rollovers, to participants outside their 401(k) plan. GAO found that some 401(k) service providers are marketing IRA rollover accounts with much higher fees than the 401(k) account to 401(k) participants

7. Firm management has the same broker for personal use. This one speaks for itself. If the CEO is playing golf with the broker, not only is that a conflict of interest it’s a prohibited transaction.

8. Revenue sharing. Revenue sharing creates an incentive for the service provider to suggest funds with higher revenue-sharing payments, even if those funds have poorer performance or higher costs for participants. GAO found that revenue-sharing payments from various investment funds ranged from 5 to 125 basis points.

9. Record keeping for revenue sharing. Using revenue sharing to reimburse for record-keeping expenses can also create conflicts of interest if these payments are not clearly disclosed to the plan. Make sure you receive and review the broker and record keeper contracts for conflicts.

10. Brokerage repayments. Arrangements can create an incentive for the service provider to recommend a more active trading strategy to increase the number of transactions and, consequently, the amount of commissions. This is especially true when an investment advisor can direct a broker-dealer to use commission revenues to pay the fees of other service providers.

In summary:

Miseducation
Bundled funds
Excessive use of annuities
Biased advice
Lack of fiduciary knowledge
Sign-up rollovers
Firm management has same broker for personal use
Revenue sharing
Record keeping for revenue sharing
Brokerage repayments

According to the GAO, conflicts of interest can have adverse effects on 401k plans. Given the multiplicity of parties involved in today’s 401(k) plan arena, many opportunities exist for business arrangements to go undisclosed. As a plan sponsor or business owner that provides a 401k plan, you have a fiduciary duty to find and correct any possible conflicts. By not doing so, you are leaving yourself exposed to the possibility of a 401k lawsuit when May 31, 2012 arrives!

Wealth Preservation: Caution Against Owning Too Many Bonds

Charles Massimo — Tue, 18 Oct 2011 13:39:00 GMT

Recent market volatility has caused many investors to turn to the bond market. Often deemed a safe haven during turbulent times and in an effort to preserve wealth, more than $800 billion has emptied into bond mutual funds according to the Investment Company Institute over the past 4 years. With the recent success of the bond market ( just ask Bill Gross of Pimco) investors have faired well, however, a recent article in Smart Money Magazine titled “Should You Ditch Your Bond Funds?”, raises key points to consider as to why investors should be cautious against owning too many bonds in their portfolio.

First, Brett Arends, the author, notes that “conventional wisdom” has always favored increasing your bond percentage as you near retirement. Target-date funds automatically shift your portfolio toward bonds as you grow older and a popular rule of thumb says you should have the same percentage of your portfolio in bonds as your age. But the point needs to be made that these rules of thumb may lead investors to ignore the price they are paying for the bond or the inverse relationships between bond prices and yields. As it stands now, bonds are expensive and the yields aren’t very attractive. “Today, even inflation protected Treasury bonds…especially for retirees-look dangerous: The long-term bonds offer meager returns, by historical standards, while the short-term bonds effectively guarantee a loss of purchasing power”.

Second, investors need to take a comprehensive look at their portfolio and recognize that they may already own a ton of bonds or bond-like investments that they never give a second thought. That would be Social Security and a home. “Social Security will pay you a guaranteed inflation-adjusted income stream for life, after you retire. And then there’s your home. If you own it and you’ve paid off the mortgage that’s the equivalent of holding an ultra safe annuity that pays your rent each year.”

The fact of the matter is with wealth preservation in mind, many retirees will turn to the bond market without realizing they already hold comparable investments. This may cause an overweighting of bonds in the portfolio as investors end up chasing performance and forgetting that bonds can be like seesaws! Investors need to look at their portfolio in its entirety and remember to include their hidden bond holdings.

401k Lawsuits: Morningstar Shows What Not to Do!

Charles Massimo — Thu, 13 Oct 2011 14:03:00 GMT

A study by AARP concluded 71% of the people surveyed believed a 401(k) didn’t cost them anything. In other words, the respondents thought providers such as investment firms were working for free in helping plan participants achieve financial freedom that their employer was responsible for any expenses. Nothing could be farther from the truth and plan sponsors, business owners, trustees and the like may be overwhelmed with 401k lawsuits after 72 million plan participants learn the truth! Starting April 2012, business owners who offer retirement plans and their employees who are investors in qualified retirement plans, such as a 401(k), will wake up to a world of transparency. A recent article by Dan Solin, “Morningstar Should be Ashamed of Its 401(k) Plan”, describes several reasons Morningstar, “who is suppose to know more about mutual funds than anyone else”, gets no gold stars for their 401k plan. The key factors to note are:

1. Morningstar’s fund selections represent everything that is wrong with 401(k) plans in this country.

2. Employees need portfolios, not funds. It’s not fair to expect employees to choose from a large number of fund options. Read more...

3. Get rid of all actively managed funds. Don’t use past performance as a benchmark. Even the best money managers can’t beat the market consistently. Just ask Pimco’s, Bill Gross. Get more tips here.

4. Research has shown time and time again that index –based investing is the best suitable option especially for retirement plans. Review “Why 401ks Should Offer Index Funds” for additional information.

The bottom line is it’s disappointing when a company like Morningstar can’t seem to get it right when it comes to their own 401k plan. Dan Solin refers to their retirement plan committee as clueless and acting in the best interest of the plan’s advisor and the actively managed mutual funds within the plan. Whatever the case, they should learn a lesson from the likes of Ameriprise, Kraft, Bechtel, ING, Caterpillar, and RadioShack to name a few. What’s worse is this list of companies that have had 401k lawsuits brought against them is probably just getting started if plan sponsors don’t start taking their fiduciary responsibilities seriously.

Comprehensive Wealth Management: 3 Reasons to Stay Disciplined

Charles Massimo — Tue, 11 Oct 2011 13:05:00 GMT

Nick Murray is one of my favorite writers on the topic of investment behavior. A great buying opportunity may be staring us right in the face yet so few investors will take advantage of it. A comprehensive wealth management plan should focus more on discipline and less on emotion. Just like every other bear market that has presented itself in the past (I have now been part of 8 in my lifetime), those who invested when things around us looked as bleak as they could be, were more than adequately rewarded. And while the media continues to focus solely on the negative, as they do in every down market, there were a few things happening over the past few months that may be telling a very different story.

1. The dollar volume of insider purchases in August was $681 million, up 15% from March 2009.

2. Another class of insiders, hedge funds that own 10% or more of a stock, was net buyers in August to the tune of a billion dollars.

3. Significant market bottoms, when they finally occur, have less to do with fundamental economic and financial shifts than with crescendos of public panic. On this, at least, Warren Buffett is right: the stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.

Insiders are no better at market timing than anyone else, but in general that’s not what they’re trying to accomplish. That’s because, since SEC rules mandate at least a six-month holding period, insiders are (or at least are intending to be) value investors rather than traders. So when a director of ExxonMobil ponies up $700,000, a director of Berkshire Hathaway invests $843,300 and even the CEO of Merck spends a million and a half dollars—just as the masses fall all over themselves getting out—somebody is usually trying to tell us something.

In conclusion:

Dollar volume insider purchases up 15% this August, from March 2009
Hedge funds investing over $1 billion this August
Shifts in public panic

support the idea that if you remain true to your comprehensive wealth management plan that was already in place, and are able to tune out the noise, you will be rewarded. Nick Murray provides a great commentary about his experience with investing. He states 2 main points that ,” Most people seem to be quite terrified by current events, and are fleeing equities in droves”, and “I have never—not once, not ever in my 45 years as an investment professional—known most people to be right for very long. To the contrary, all my experience indicates that huge and very emotional public consensus—bullish and bearish—turns out relatively soon to be wrong. But my experience, I hasten to repeat, is not predictive. It does; however, tend to bear out the wisdom of something that the late Sir John Templeton, the father of international investing, was fond of saying: "Among the four most dangerous words in investing are ‘It’s different this time. "

Dimensional Fund Advisors: Committed All the Way!

Charles Massimo — Thu, 06 Oct 2011 15:54:00 GMT

We’ve had a long-standing relationship with Dimensional Fund Advisors for over 10 years. One of the cornerstones of their approach is a client base committed to their investments through all market cycles, both good and bad. Their academic approach to investing and belief that markets are efficient has created a Family of Funds that is increasingly becoming known for their diversification, low costs, low turnover and performance.

Aside from the fact that DFA always puts the client first, Dimensional Fund Advisors was ranked number one in advisor commitment by Cogent Research, maintaining its top spot from 2010. Cogent Research is a market research firm providing both custom and syndicated research. The company specializes in research design, data collection, and marketing analysis services. They surveyed 1643 advisors to measure their degree of loyalty to their current providers and the likelihood of making future investments with those providers. Review the full list in the article, “Top Funds for Advisor Loyalty”.

According to John Meunier a principal at Cogent, “Long-term investment performance and consistency of performance are important to advisor commitment”. Besides performance, investment philosophy and quality and depth of research are two of the biggest drivers of advisor commitment to fund managers.

Dimensional Funds believes that financial advisors play a vital role in educating investors about the financial science that drives their approach and in instilling the discipline required to benefit from it. Rather than speculating, DFA believes that over time, a well-structured investment approach will add value with a higher reliability and confidence level than one based on instinct and prediction. Their role in the research community helps the firm discover and refine state-of-the-art concepts and strategies. For two years in a row advisors have remained committed to DFA. The best part is Dimensional Fund Advisors is just as committed to their advisors and clients!

401k Lawsuits: Ameriprise Sued By Own Employees

Charles Massimo — Tue, 04 Oct 2011 15:10:00 GMT

You have a company that has been in business since 1894, and they are being sued by their own employees. Ameriprise Financial has a 401k lawsuit against them because employees claim they lost about $20 million since they were invested in funds managed by Ameriprise subsidiaries that had excessive fees in addition to poor performance.

The suit, which was filed on September 28, is seeking class action certification. The potential class includes more than 10,000 members, the lawsuit claims. The named defendants include Ameriprise and the firm’s 401k investment committee as well as the compensation and benefits committee of the board of directors. The workers are claiming that Ameriprise and its committees, as the plan overseers, violated their fiduciary duty to the retirement plan. The plaintiffs are also accusing the company of fraud, unjust enrichment, and prohibited transactions. The suit focuses on hundred of million in 401k assets that were invested in mutual funds run by RiverSource Investments, which then became Columbia Management Advisers, an Ameriprise subsidiary. Between 2005 and March 2007, an average of $500 million in plan assets went annually into RiverSource and Ameriprise Trust Co., the trustee and record keeper of the plan. The 401k plan in question was launched in 2005, and the suit seeks to represent all employees affected by the plan since that time. The basis for the suit is that the mutual funds in question have fees that are “significantly higher than the median fees for comparable funds”. Also, various funds in the plan had poor or nonexistent performance history. The plaintiffs stated, “Defendants chose more expensive funds with inferior performance histories in order to generate revenue for RiverSource and Ameriprise Trust Co., and ultimately to benefit Ameriprise.”

This is a huge wake-up call for plan sponsors, business owners and fiduciaries who continue to ignore upcoming DOL regulations that will finally disclose excessive, hidden fees contained in 401k plans that are shrinking retirement plan balances unbeknownst to hard working plan participants. The potential for a 401k lawsuit against you and your company for breach of fiduciary responsibilities is real. As more and more employees and plan participants are informed about the fees their 401k accounts are being charged, rest assured there will be more lawsuits. It only takes one person to file a class action suit. The plaintiffs are seeking restitution, expelling of all revenues and the award of actual money losses. Such a hit could be devastating to a company’s business. Look at it this way, even a company that manages $650 billion in assets and is a top 10 provider of mutual funds, insurance, annuities, etc, got caught with their hand in the till.

Even if this 401k lawsuit is found to have no merit, the time, money, and effort that will be spent should be enough to get you to at least begin examining your existing plan and making any necessary changes to provide the best possible plan for your employees. At a minimum, shop your plan around, take part in a competitive bidding process or at least have an independent, unbiased analysis of the fees in your 401k. It’s important to keep in mind that even a fiduciary’s lack of action could be deemed a breach of their responsibilities. If plan participants have lost a sizable portion of their account balances to fees, and as a plan sponsor, trustee or business owner, you’ve not explored other options, you could be at risk.

Wealth Preservation: How Financial Advisors Help Women Build

Charles Massimo — Thu, 29 Sep 2011 17:16:00 GMT

It goes without saying that women face special financial challenges. Wealth accumulation and wealth preservation can be more difficult for women because they generally live longer, earn less and sometimes exit the workplace to care for children or elderly parents. Even though financial advice is the same whether you’re a man or women, research has shown that women, even professional women, have a tendency to be less financially literate than their male counterparts. The reasoning is simple.

Studies show that women just don’t find money and investing as interesting as men. But studies also show that being under funded for retirement is the single most common problem women and baby boomers face more so than men. Not having a sound wealth preservation, investment and asset management plan in place is the primary reason.

Following the financial crisis of September 2008 and the subsequent recession, many investors credited their financial advisors for protecting their assets and limiting their losses. A fidelity investments survey of millionaires with financial advisors saw their average investable assets decline by 4% versus the average 18% decline experienced by individuals without advisors. Financial advisors often prevent their clients from making financial mistakes with serious consequences. They help clients dispel commonly-held misconceptions about investments as well.

For example, many women have the wrong or incomplete understanding of Social Security. Some do not understand the full ramifications of starting Social Security at 62 versus 66 and /or how to schedule withdrawals from Social Security or their retirement accounts (i.e., Should a lump-sum be withdrawn from the pension plan upon retirement? Are monthly annuities a better option? What are other options based on my individual circumstances?)

Many women are also unaware that certain rules apply to their individual retirement accounts. Lastly, many women believe their cost of living will decline significantly during retirement. However, while some costs factors may decrease such as housing, other costs rise such as healthcare. Working with the right financial advisor can help to alleviate and clarify these situations.

The fact is women can be better financial decision makers than men because they are willing to learn and will admit when they do not know something or require additional explanation or information. Women are also less prone to risky behavior.

Having a financial advisor can provide the guidance that is needed to develop a sound investment plan that will help you reach your wealth preservation and accumulation goals. The value of having the right financial advisor is especially important for women facing a life-altering event. Whether it's marriage, the birth of a child or grandchild, divorce, death or the serious illness of a spouse, the right advisor makes all the difference in the world.

401k Fees: Electronic Disclosure to Participants

Charles Massimo — Tue, 27 Sep 2011 18:09:00 GMT

Plan sponsors, business owners, plan trustees and even service providers are still not as prepared as they should be for new, upcoming Department of Labor disclosure regulations. Many feel the issue of 401k hidden fees isn’t a big deal or that the DOL isn’t serious in this endeavor. Others hope enforcement deadlines will be pushed back again and continue to put off what is actually their fiduciary responsibility. The rest simply don’t care or have allowed complacency and familiarity with existing providers to hinder their duty to question the reasonableness of fees. Most of these procrastinators will have a rude awakening come next year.

The Department of Labor’s Employee Benefits Security Administration (EBSA) recently issued an interim electronic disclosure policy for its fee disclosure regulation, namely 404(a)(5). EBSA is responsible for administering and enforcing the fiduciary, reporting and disclosure provisions of Title I of ERISA. They oversee roughly 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401k type plans.

404(a)(5) will ensure that workers in a 401k plan or similar type plan, are given or have access to the information they need to make informed decisions, including information about fees and expenses, as well as investment related information that will allow them to compare investment options.

What that means is that roughly 72million plan participants will be enlightened. In a nutshell, these people are going to be told something they were never told before regarding their 401k fees. Many of these individuals believe they aren’t paying any fees in their 401ks at all!

When using electronic disclosure, plan sponsors will have to make sure they comply with the conditions regarding disclosures included in pension benefit statements and disclosures that are not included in pension benefit statements. For those not included, 7 conditions have to be noted:

Voluntary provision of e-mail address
Initial notice
Annual notice
Delivery
Confidentiality
Calculated to be understood
Special Transition Provision

May 31, 2011(60 days after the April 1, 2011 effective date) in when information on fees and expenses paid will have to be provided to employees so that business owners, plan trustees, plan sponsors, etc can avoid enforcement of fines and fees by the DOL and IRS. Stop procrastinating and start preparing!

Dimensional Funds: Top 3 Articles for Passive Investing

Charles Massimo — Fri, 23 Sep 2011 16:39:00 GMT

Dimensional Fund Advisors has always attested to the fact that it’s virtually a waste of time, money and energy to attempt to beat the market. DFA’s approach starts with the idea that stock-picking is basically futile. Their success comes from keeping fees low and being tax efficient but also involves diversification, a focus on smaller stocks as opposed to larger stocks, and value over growth.

The past two days have been extremely volatile with yesterday’s market closing down over 283 points. Today, the Dow Jones is currently down over 425 points, the Nasdaq is down over 93 points and the S&P has declined over 42 points and it hasn’t even reached 4:00p.m. This makes it the optimal time reiterate why a passive investment strategy is the better choice for an overall optimal market experience.

1. A recent article in CBS Money Watch, “Passive Management Wins in Emerging Markets”, makes the point that since all emerging market stocks must be owned by someone, and passive investors earn the market returns less low costs, and in aggregate, active investors must also earn the market return less high costs, in aggregate passive investors must earn higher net returns than active investors.

2. “Ditching the Monkey” is worth revisiting. This article sums up passive investing in one sentence, “Attempting to beat the stock market through shrewd stock selection, argues Dimensional Fund Advisors, is like trying to determine which money in a million will accidentally type Hamlet.”

3. The article, “Dimensions of a Pioneering Strategy”, stresses that minimizing trading costs is a priority for DFA, and its managers spend much time working out ways to trade optimally. For instance, if two Dimensional funds have the same stock slated for purchase, the firm will try to buy the stock in one transaction, and it will try to buy large block of shares at negotiated, below-market prices. They believe an advantage they hold over index-based funds is that they don't rush to buy or sell when an index kicks a company out of the lineup and adds a new one.

With this week gearing up to be the worse week for the stock market in 3 years, investors should at least make certain they’re not falling prey to active managers promising to be able to navigate in this type of market. More often than not, investors end up selling out at the bottom, and missing the opportunity to recoup losses when the market recovers. Since DFA moves away from attempting to beat the market and encourages holding steadfast to your investment strategy regardless of what the market is doing (diversification is key), now makes it the best possible time to consider exploring adding DFA funds to your portfolio.

Retirement Income Planning for Women

Charles Massimo — Tue, 20 Sep 2011 14:00:00 GMT

The news regarding retirement savings for women is not good. Women need to develop a retirement income plan in order to avoid financial hardships. Many women will outlive their husbands and the average age when a woman becomes a widow is much lower than you think. According to a recent U.S. Census Bureau study, the average woman in the United States becomes a widow at age 56.

A study released by Allianz Life said around 40% of the women who participated found information on financial planning and investment either too complicated to understand or too boring to follow.

However, LIMRA, a worldwide research, consulting and professional development organization that serves over 850 insurance and financial services companies in 73 countries did a survey comparing the retirement savings of working men and women. The research found the following:

Women’s average defined contribution plan balances were 60% of men’s average balances.
The average plan balances of working women age 50 years or older are below those of working men of the same age by nearly $63,000.
Women in this age category are also more likely to earn less than men of the same age, making it even more difficult to contribute to a sound retirement income plan.

These findings are also supported by a Mass Mutual 2010 survey which found that women’s retirement accounts were, on average, two-thirds that of men.

More surprising facts by a Transamerica Center for Retirement Studies’ survey of 1,800 American working women found that:

82% of those women surveyed are unsure or don’t know any of the fees they may be charged in an employer-sponsored plan
57% didn’t know that people age 50 and older may be allowed to make catch-up contributions to their retirement plans
41% believed that, after retirement their primary source of income to cover living expenses would be their 401k or IRA
Approximately 33% expected Social Security to be their primary source of income.

Women are living longer than men and should take a proactive role when it comes to their finances. They should have a disciplined, structured plan in place when it comes to their retirement.

The right advisor can play a crucial role in putting together the proper plan to meet your retirement income needs. Finding the right financial advisor isn’t something that can wait. Unfortunately this often becomes apparent when it’s too late.

403(b) Plans: Top 3 Articles to Protect Teachers!

Charles Massimo — Wed, 14 Sep 2011 14:00:00 GMT

Many non-profit employers that offer 403b plans were scrambling to bring their plans into compliance with IRS rules that took effect January 2009. 403b plan fiduciaries will also be faced with making a determination on the “reasonableness” of plan fees.

This will be a disheartening chore since in the 403b marketplace, costs of recordkeeping, TPAs, advisors, investment costs, etc. have historically been bundled making it almost impossible to get to the true costs and expenses of a plan.

Unfortunately, teachers are a key group that find themselves greatly affected by the excessive fees and continued mismanagement of 403b plans since 403b plans are the public’s sector version of 401k plans.

Below are 3 articles that illustrate why teachers as well as district administrators and plan sponsors of these 403b plans need to be made more aware of how these plans are structured and why now is the best time to review your plan, ask questions and make the necessary changes to provide the best possible plan for teachers.

1. “Some 403b Retirement Plan Advice for Teachers”, stresses the fact that most school districts take a hands-off approach allowing any investment firm to offer a plan to employees. Most of these plans include high-cost annuities and other insurance options not to mention high-upfront commissions. Dan Otter put it best when he states, “There are very few things we can control in investing, but we can control how much we pay for our investments.”

2. It pays to be proactive, and Bruce McNutt proved this when he questioned the fees he was paying in his 403b plan. “As relatives of the 401(k) plan, 403(b)s are all too often ugly stepsisters. The plans are typically sold by brokers and insurance agents, carry above-average mutual fund expenses and layers of other fees. Designed as supplemental retirement plans for teachers and their employees of non-profit institutions, they are among the costliest retirement vehicles on the market.” If you want to get rid of these needless expenses, you have to lobby other employees as well as your employer. Read on to see how Bruce McNutt succeeds in “New Jersey Teacher Wins Fight on Retirement Fees”.

3. “Teachers Have Few Defenses When Investing in 403(b)s” shows what can happen when you don’t have the initiative of a Bruce McNutt mentioned above. This article highlights the lack of regulation within the 403b industry and again warns teachers of the many hidden fees that are eroding their retirement efforts.

Hidden 403(b) plan fees may be hurting your retirement plan. Get the facts and take action today.

Comprehensive Wealth Management: The Fear Factor

Charles Massimo — Tue, 13 Sep 2011 14:00:00 GMT

When you have a comprehensive wealth management plan in place, you tend not to be as affected by the recent swings we’ve seen in the market. On the contrary, your attention would shift to your long-term strategy of discipline and diversification, and recent market woes would only be viewed as a hiccup; a single moment in time. Historically speaking, investors that pull out when the market is down, almost always miss the turn around and the opportunity to recover.

“The Hidden Dangers in Safe Havens”, a recent article in the NY Times, describes how investors abandoned their investment strategy and fled to gold and Treasuries in the midst of the recent market downturn. This can ultimately hurt investors in the long run because they are acting on fear, not logic.

Being fearful is one thing, but acting on it may be damaging to your existing portfolio. Joseph Spada, a managing director, says, “If you were right about the timing decision to get out, you’re going to have to be right again about when to get back in”. This has proven to be difficult for even the most seasoned professionals, let alone an individual investor.

Now these investors are left with large positions in Treasuries and gold without realizing the consequences of their actions. “It would not take much improvement for investors to lose money quickly in their investment in Treasury bonds.” If they hold the bonds to maturity they may actually lose money if the interest being earned on the bonds is below inflation. For example, the 10 year Treasury note was yielding 2.10%, but inflation has been around 3% to 4%, most recently 3.6%. That means the investor would actually be losing 1.5% in purchasing power.

When it comes to gold, “People forgot that gold’s value was driven by sentiment…Gold doesn’t have any intrinsic value...When you incorporate exchange traded gold funds, there is even a bigger risk. While they let small investors buy gold easily-the price of one share of the GLD exchange traded fund is roughly one-tenth the price of an ounce of gold-that same ease of buying means investors can just as quickly sell their shares in a panic”.

Greg Fisher put it best when he stated, “The risk of changing your strategy when it’s being tested as opposed to changing it when it’s not being tested is you risk derailing your long-term investment plan”. Fear can drive an investor to overweight their portfolio with certain asset classes, in this case Treasuries and gold, which can be detrimental to their long-term goals.

If you have a comprehensive wealth management strategy in place, stick to your initial plan and realize you may be doing more harm than good if you let fear get the best of you.

401(k) Hidden Fees Lead to 401(k) Lawsuits

Charles Massimo — Thu, 08 Sep 2011 14:00:00 GMT

Even with the Department of Labor (DOL) extension of fee disclosure regulations until April 1, 2011, plan sponsors need to be aware of the various types of hidden fees imbedded in their 401k plans. Doing so can help them avoid DOL audits, fines and lawsuits. Below is a compilation of the 401k hidden fees discussed in our 5 part series.

1. Asset management fees

2. Broker commission costs

3. Statement of Additional Information expenses

4. 12b-1 fees

5. Annual audit fees

6. Participant education fees

7. Investment transfer expenses

8. Non-discriminatory testing fees

9. Record keeping fees

10. Custodian fees

11. Third party Administration fees

12. Plan document filing/set up or conversion costs.

13. Trust service costs

14. Installation fees

15. Enrollment expenses

16. Loan fees

17. Termination fees

18. Surrender charges

19. Mortality Risks or M7E charges

20. Management fees

21. Wrap or bundling fees

22. Revenue sharing fees

Companies such as Radio Shack, Kraft, Bechtel Corporation, Wal-mart, and ING to name a few, have all had 401k lawsuits brought against them for breaches of fiduciary responsibility, using retail instead of institutional shares, 401k hidden fees and revenue sharing issues.

When April 1, 2011 comes around, even more plan participants and disgruntled employees will become aware of the mismanagement of their 401k savings.

Recessionary worries, market volatility and the current economy will make it a prime time for the IRS and DOL to enforce their 15% and 20% excise tax for plans that continue to resist reasonable fees for reasonable services and for plan sponsors who continue to duck their fiduciary responsibility.

Wealth Preservation: You Can’t Time the Market!

Charles Massimo — Tue, 06 Sep 2011 19:23:00 GMT

Realizing how you invest is just as important as where you invest our passive approach to investing focuses on investing for the long-term and rejecting short-term speculation.

Time and time again, we’ve revisited the fact that trying to time the market, speculating, or attempting to pick the next stock that will double overnight, will almost always leads to failure and that passive investing will outpace an active management approach especially if you are invested for the long-term.

Wealth preservation is about developing an investment foundation that is solid; one that is based on diversification across a broad range of asset classes. The main objective is to limit exposure to market volatility and balance risk, which tends to secure consistent returns over the long-term.

“Pimco’s Gross Regrets ‘Mistake’ on US Debt Call”, reiterates the fact that trying to guess the direction of the market and investing accordingly is a difficult task for even the most seasoned investors. Here is the manager of the world’s largest bond fund admitting his mistake in betting against US government debt.

The article states, Mr. Gross started to buy government debt, as well as related securities and derivatives in recent months. However, he faces a challenge to catch up to the benchmark, which has returned 4.55 percent for the year so far, versus, the Total Return Fund’s 3.29 percent, according to Lipper, a research group. “When you’re underperforming the index, you go home at night and cry into your beer,’ he said adding: “it’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boohoo’.

Not to beat a dead horse, but remember, he gets paid whether the investor makes money or not. So is he really hanging his head or is the investor who loses money the one who ends up crying because Bill Gross was willing to bet with their money!

Anyway you put it, ineffective diversification; failing to rebalance your portfolio with changing conditions; trying to out-guess the markets; and overactive trading are just a few of the ways investor’s portfolios are sabotaged.

Wealth preservation and a passive approach to investing go hand in hand. A passive approach can equip you with confidence, security and peace of mind, thereby eliminating the need to cry in your beer!

Wealth Preservation: Top 3 Mutual Fund Problems & Solutions

Charles Massimo — Thu, 01 Sep 2011 13:30:00 GMT

It’s unfortunate how many investors get taken advantage of by the mutual fund industry. Concerned about wealth preservation and driven by fear, all too often investors are the ones who suffer. A recent article in the NY Times called, “The Mutual Fund Merry-Go-Round”, written by David Swensen, Chief Investment Officer at Yale University, highlights major issues within the mutual fund industry and 3 key solutions to help in protecting investors.

The top 3 problems with the mutual fund industry are:

Investors believe that mutual funds provide a safe haven, placing misguided trust in brokers, advisers and managers.
Major marketing efforts by fund companies lure unsuspecting investors who suffer below-market returns while mutual fund management company owners enjoy market-beating results. They market 4 and 5 star funds rated by Morningstar, but the rating system identifies funds that performed well in the past. Investor portfolios are churned and profits trump the duty to serve investors. All this as money flows from low rated mutual funds to four and five start funds and the mutual fund industry encourages performance-chasing.
Lack of regulation and oversight to protect investors as the mutual fund industry makes campaign contributions to influence politicians and lobbies to avoid regulation.

The top 3 ways investors can be sheltered from the mutual fund industry are:

Individual investors need to stop being so trusting. They need to take control of their financial futures, educate themselves and invest in a well-diversified portfolio of low-cost index funds.
The SEC should encourage individual investors to turn to low-cost index funds instead of continuing to be subjected to “the broker-driven churning of high-cost, actively managed funds”. David Swensen even goes so far as to suggest the Sec should require every mutual fund offering to be accompanies y an index-fund alternative with the burden of proof on the vendor to justify the sale of a high-cost product.
Hold the mutual fund industry to a higher standard, a “fiduciary standard” like that outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The mutual fund industry manages more than $13 trillion for over 90 million Americans and is by far one of the least regulated over the past 20 years. Investors need to take the initiative and do their own due diligence when it comes to purchasing mutual funds instead of relying solely on information being fed to them by the same individuals misleading them.

403(b) Plans: Get Ready for Department Of Labor Fines

Charles Massimo — Tue, 30 Aug 2011 17:33:00 GMT

New regulations by the Department of Labor (DOL) regarding fee disclosure will leave many 401k plan sponsors devastated if they do not begin to take measures to ensure compliancy and protect themselves against fines, fees and possible lawsuits. However, many 403b plan trustees and sponsors will also be surprised when the DOL comes knocking on their door because of inadequate Form 5500 filings. New regulations have caused additional administrative as well as legal responsibilities for these 403b plan sponsors.

The main issue is prior to January 2009, 403b plans enjoyed many exemptions. After January 2009, 403b plans came to be treated similarly to 401k plans and requirements that the 401k market had long been subjected to were now also a reality for 403b plans. The main issue and reason why 403b plan sponsors should be very afraid is that these plans now have to file full Form 5500s. Not only that, those 403b plans subject to ERISA will now have to also comply with 408(b)2 regulations as well.

It’s surprising how many 403b plans will be subject to DOL fines that can reach upwards of $80,000-$100,000 for filing without submitting an independent auditor’s report. Over 2000 plans to be exact! A startling statistic regarding 403b requirements is that out of the 19,200 403(b) plans, about 7,000 have 100 or more participants, but only about 5,100 were submitted with auditor’s reports as required. Remember, if a plan has over 100 participants an auditor’s report is required.

A recent post titled, “403b Plan Alert- Did Your Form 5500 Miss the Boat”, provides additional insight into the new requirements that 403b plan sponsors need to adhere to in order to avoid being penalized by hefty fines. One major point 403b plan sponsors need to keep in mind is that the plan administrator is subject to DOL penalties of up to $1,100 per day for each day ERISA plan Form 5500 which is late, incomplete or prepared incorrectly.

The DOL made every effort to inform plan sponsors, business owners, etc about the new 403b regulations of January 2009. There will be no excuse when the DOL comes to collect because of insufficient auditor’s reports.

DFA Funds: Passive Perfection

Charles Massimo — Fri, 26 Aug 2011 16:20:00 GMT

If you listen to the news or watch TV, it’s enough to make you want to crawl under your bed and never come out! Recent market swings have left investors wondering if the economy is at risk for another recession. Now more than ever is when investors seek guidance on ways to protect their existing portfolio and that makes it the optimal time to revisit DFA Funds' passive approach to investing. What investors need to realize first and foremost is that they should not pay for something that is practically impossible to achieve. More and more evidence shows that paying for an active manager is costly and a waste of time and hard-earned money.

Active managers assume that markets don’t work so they attempt to beat the market through security selection and market timing. Index managers assume that markets work and allow commercial benchmarks to dictate their strategy. They rarely deviate from the indices they follow and will often buy high-priced stocks to stay in line with their underlying index. On the other hand, though Dimensional Fund Advisors assume markets work, unlike the average index manager DFA tries to capture specific dimensions of risks identified by financial science. The results of these different philosophies are that the active manager generates higher turnover, transaction costs and taxes due to speculative trading while index managers actually accept high transaction costs and turnover in favor of tracking.

Some may refer to DFA’s investment style as enhanced indexing combining elements of passive management and active management. It resembles passive because enhanced index managers cannot (in principal) deviate significantly from commercially available indices which are derived from the S&P or Russell. Enhanced indexing strategies have lower turnover and fees than actively managed portfolios. However enhanced indexing to some may resemble active management because it allows managers the latitude for certain deviations from the underlying index. These deviations can be used to minimize transaction costs and turnover, or to maximize tax-efficiency.

Two recent articles one in Forbes yesterday titled, "Active Funds Continue to Struggle," and the other, "Active Fund Still Trailing," reiterate the fact that active managers remain outpaced by passive indexes. This was based on findings by SPIVA, the S&P Indices Versus Active Fund Scorecard which was released yesterday by the S&P. This report actually quantifies active manager shortfalls.

The bottom line is DFA has often been called one of the mutual fund world’s least known revolutionaries because of their investing practices. Dimensional Funds minimize costs and enhance returns through portfolio design and trading. They will never buy a high-priced popular stock of the day just to ensure that they continue to mirror whatever index they are tracking. Instead, they have a patient and price-conscious buy and hold approach to trading that is designed to minimize costs which work to the client’s advantage and is welcomed given current investment concerns.

401k Fiduciary Liability: 4 Articles to Avoid a 401k Plan Disaster

Charles Massimo — Wed, 24 Aug 2011 14:00:00 GMT

Even as the deadline for new DOL regulations approaches, plan sponsors, business owners and trustees are still not prepared for the consequences of non-compliancy. Plan sponsors are fiduciaries for the plan and are personally liable if a plan participant complains; if the DOL performs an audit and the 401k plan is not in accordance with new regulations; and if the IRS deems there were prohibited transactions or conflicts of interest that warrant excise taxes or fines. These 4 articles provide some guidelines into best practices and can help you decrease your fiduciary liability if you implement some of their suggestions.

1. “Flawed Investing is Depleting Pension Assets”, reminds us that past performance is not indicative of future performance. The best proposal for your 401k plan is to get rid of active managers. Stop using fund managers who try to beat the market. It’s costly and it doesn’t work. Not only that, you can be exposing yourself to a prohibited transaction. http://money.usnews.com/money/blogs/On-Retirement/2011/08/04/flawed-investing-is-depleting-pension-assets

2. The article, “Why Plan Sponsors Should Care About Retirement Plans”, offers several reasons why it is in the plan sponsor, business owner or trustee’s best interest to understand the great responsibility they have as plan sponsors and why they need to care about their role. If not run properly, a retirement plan becomes a liability risk for plan sponsors.
http://documents.jdsupra.com/87df7d16-8a08-4663-ab77-af06b0a98751.pdf

3. “Nowhere to Hide on Hidden Fees”, reminds plans sponsors that hidden fees are cutting deeply into the savings of hardworking employees. “This has led to a flurry of "hidden fee" litigation, reflecting plan participants' dissatisfaction with inadequate fee-disclosure requirements and the need for protection from excessive fees.” http://www.cfo.com/printable/article.cfm/14582641#

4. “The DOL Begins Crackdown on 401(k) Providers for Fee Bundling Abuses”, drives the point that the Department of Labor will no longer sit idly by as plan participants are taken advantage of. “Service providers who were traditionally unwilling to break down their opaque “bundled” pricing — the all-in-one administrators, record keepers and custodians — are now staring down the barrel of a gun.” http://thetrustadvisor.com/news/401kfees

Retirement Investments: Embrace a Passive Strategy for Erratic Times

Charles Massimo — Fri, 19 Aug 2011 15:16:00 GMT

Recession worries, based on a slew of economic numbers pointing to a slow down of the US economy as well as fears surrounding Europe, caused another chaotic day in the market on August 18. The Dow closed down roughly 419 points, while the NASDAQ ended more than 5% lower and the S&P ended over 4% lower.

It’s enough to leave the average investor battered, confused and alarmed about their retirement investments. However, know this; even the smartest minds in the world with the greatest returns, can’t do it year in and year out. That’s why following a passive philosophy will provide for more consistent returns particularly when it comes to your retirement investments. A recent article, “Paulson Loses 31% in Main Hedge Fund,” talks about billionaire John Paulson and the losses his hedge fund is experiencing.

This is the same individual who acquired billions betting against sub prime. He is also an NYU and Harvard graduate, but again he could not predict the performance of some of the largest positions in the fund. Of his top 10 stock holdings, half were financial services companies such has Citigroup, Hartford Financial and SunTrust all of which have been pummeled by the market. A passive approach stays away from trying to pick individual winners among equities, or in trying to time market swings.

Another recent article, “What Are the Odds of an Active Portfolio Outperforming,” makes several assumptions in order to provide more accurate, detailed information about active management. The conclusion: “active management is the triumph of hype, hope and marketing over wisdom and experience. Choosing passively managed fund to implement your investment plan is the winning strategy-the one most likely to allow you to achieve your goals”. Even more important was the point made that most investors have investment horizons longer than 10 years.

This is especially true in regard to retirement investments. The study also found that the longer the investment horizon, the worse the odds of success for active management. David Booth, co-founder of Dimensional Fund Advisors, likens investors trust in active stock picking to buying lottery ticket: “While they have the lottery ticket they can dream the dream,” he says. Advocates of passive investing insists that the odds of beating the market over time indeed are similar to the odds of winning big with the Lotto: it’s possible, but highly unlikely.

Part V- 401k Hidden Fees: What You Don’t Know Will Cost You!

Charles Massimo — Thu, 18 Aug 2011 15:36:00 GMT

401k hidden fees have been at the forefront of 401k lawsuits. Many companies, especially smaller businesses, are shifting plan administrative expenses to plan participants, knowingly or unknowingly. These shifts of plan expenses come in the form of "hidden fees" that are routinely deducted from each participant’s retirement savings by some plan providers and mutual funds. This is the last in our series regarding the various shapes, sizes and names that 401k hidden fees can come in. Parts I through IV below.

Part I- Top 3 401k Hidden Fee Misconceptions

Part II- 401k Hidden Fees: 5 More Fees to Look Out For

Part III- 401k Hidden Fees: Top 5 Administration Fees

Part IV- 401k Hidden Fees: You Pay for Everything

Insurance companies have become the biggest culprits when it comes to hidden fees, packaging them in ways that make it next to impossible for even the savviest investor to unravel.

18. Surrender charges- These are fees an insurance company may charge when an employer terminates a contract (in other words, withdraws the plan’s investment) before the term of the contract expires or if you withdraw an amount from the contract. These fees normally decrease over time. The period for which the charge can remain in effect can run anywhere from 1 to 12 years. This is to discourage a short term investment by the investor, but the fact remains the main purpose is it makes money for the insurance companies. It is similar to an early withdrawal penalty on a bank certificate of deposit or to a back-end load or redemption fee charged by some mutual funds.

19. Mortality Risk or M & E charges- This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract. In general, these fees in a variable annuity will be charged as a percentage of the average value of the investment and will probably be quoted as “basis points”. Basically this is an asset-based fee which means it will increase as the size of the plan increases even though you receive no additional benefits. In a fixed annuity, these charges are usually incorporated in the insurance company’s determination of the periodic interest rate or the annuity payment amount during the distribution phase.

Wealth Management Strategy: 6 Critical Points for Turbulent Times

Charles Massimo — Fri, 12 Aug 2011 15:30:00 GMT

The equity market has been and continues to experience volatility, reflecting uncertainty surrounding economic issues at home and abroad. Now more than ever investors need to have a comprehensive wealth management plan in place and exercise discipline. The recent market swings are reviving unwelcome feelings among many investors—feelings of anxiety, fear, and a sense of powerlessness. These are completely natural responses. Acting on those emotions, though, can end up doing us more harm than good.

At base, the increase in market volatility is an expression of uncertainty. The sovereign debt strains in the US and Europe, together with renewed worries over financial institutions and fears of another recession, are leading market participants to apply a higher discount to risky assets. So, developed world equities, oil and industrial commodities, emerging markets, and commodity-related currencies like the Australian dollar are weakening as risk aversion drives investors to the perceived safe havens of government bonds, gold, and Swiss francs. It is all reminiscent of the events of 2008, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from private-sector to public-sector balance sheets.

What happens next, no one knows for sure. That is the nature of risk. If you have a thorough wealth strategy in place, don’t panic. But there are 6 points individual investors can keep in mind to make living with this volatility more bearable.

1. Remember that markets are unpredictable and do not always react the way the experts predict they will. The recent downgrade by Standard & Poor's of the US government's credit rating, following protracted and painful negotiations on extending its debt ceiling, actually led to a strengthening in Treasury bonds.

2. Quitting the equity market at a time like this is like running away from a sale. While prices have been discounted to reflect higher risk, that's another way of saying expected returns are higher. And while the media headlines proclaim that "investors are dumping stocks," remember someone is buying them. Those people are often the long-term investors.

3. Market recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was last this bad—the S&P 500 turned and put in seven consecutive months of gains totaling almost 80 percent. This is not to predict that a similarly vertically shaped recovery is in the cards this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

4. Never forget the power of diversification. While equity markets have had a rocky time in 2011, fixed income markets have flourished—making the overall losses to balanced fund investors a little more bearable. Diversification spreads risk and can lessen the bumps in the road.

5. Markets and economies are different things. The world economy is forever changing, and new forces are replacing old ones. As the IMF noted recently, while advanced economies seek to repair public and financial balance sheets, emerging market economies are thriving.¹ A globally diversified portfolio takes account of these shifts.

6. Nothing lasts forever. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.

In summary, remember

Markets are unpredictable
Quitters never win and winners never quit
Market recoveries can come quickly
Diversify, diversify, diversify
Markets and economies are two different things
Nothing last forever-this too shall pass

but through discipline, diversification, and understanding how markets work, the ride can be made bearable. When you have a comprehensive wealth management plan in place, at some point, value will re-emerge, risk appetites will re-awaken, and for those who acknowledged their emotions without acting on them, relief will replace anxiety. The key is to manage long-term objectives with a focus on diversification as an important risk control against unpredictable outcomes.

Dimensional Fund Advisors: Top 4 Articles to Tune Out The Noise

Charles Massimo — Wed, 10 Aug 2011 13:00:00 GMT

During volatile and uncertain times such as these it’s important to remain educated and informed on the investment disciplines that will help clients achieve a much more successful investment experience thereby protecting, as prudently as possible their financial independence.

Some may get a little anxious with the investment approach of Dimensional Fund Advisors (DFA) but the reality is since the inception of the financial markets there has never been an approach that has proven to be more prudent or consistent. DFA Funds, by virtue of dismissing stock picking and market timing, is not an active investment manager yet at the same time it is not an index manager.

The Dimensional passive approach stems from them developing their own definition of asset classes and not restricting themselves by the mandate of tracking. This flexibility allows them to add substantial value to their investors.

The first one is from this weekend’s NY Times titled Resisting the Urge to Run Away From Home which highlights many of the mistakes investors make during uneasy times.

The second is from Weston Wellington at DFA titled Sovereign Debt and the Equity Investor which discusses how credit ratings impact stock prices.

The third also from DFA’s Bryan Harris titled Thinking in Real Terms discusses the urge to rush to cash and the possible pitfalls of doing so.

And the fourth piece, titled A Twist on Passive explains in greater detail Dimensional Fund Advisors’ approach to investing and why this approach sets them apart from other investment management firms.

Wealth Management Expert Says: Control Your Emotions!

Charles Massimo — Tue, 09 Aug 2011 20:00:00 GMT

Charles Massimo, Wealth Management Expert, on 97.3 KIRO radio says, “Control Your Emotions”!

It’s easy to panic right now if you are an investor. With the debt crisis debacle, the recent S&P downgrade and the volatility of European markets, the key to weathering the current state of the economy is to “control your emotions”.

Top wealth management firms and advisors should be informing their clients that the worse time to sell stocks is on the dip. We went through the same thing in 1980-81 during a double-dip recession. If you cash out at the bottom and sit on the sidelines, you’re doing more damage to your portfolio than you realize. Don’t try to pick and choose when to get in and when to get out of the market. Have a game plan and stick to it!

Listen to the show:

Wealth Preservation in Volatile Markets: Discipline is Your Best Tool

Charles Massimo — Fri, 05 Aug 2011 16:35:00 GMT

The worst day for the Dow Jones since December 2008 was on August 4, 2011. The Dow dropped 513 points and lost all of its gains for the whole year in just the last two weeks. The NASDAQ didn’t do much better, losing 136 points. Many economists call the plunge a ‘market correction’. Some say it’s another recession while others believe the 2008 recession never actually ended. However, now is not the time to make knee-jerk reactions. In wealth preservation efforts, investors can’t let their emotions run away with them.

Working with markets, understanding risk and return, diversifying and portfolio structure—we've heard the lessons of sound investing over and over. But so often the most important factor between success and failure is ourselves. The recent rocky period in financial markets has brought to the surface some familiar emotions for many, including a strong urge to try to time the market. The temptation, as always, is to sell into falling markets and buy into rising ones. What's more, the most seemingly "well-informed" people—the kind who religiously read the financial press and watch business television—are the ones who feel most compelled to try and finesse their exit and entry points.

This suspicion that "sophisticated" investors are the most prone to try and outwit the market was given validity recently by a study, carried out by London-based Ledbury Research, of more than 2,000 affluent people around the world.¹ The survey found 40 per cent of those questioned admitted to practicing market timing rather than pursuing a buy-and-hold strategy. Yet the market timers were more than three times more likely to believe they traded too much.

"On the face of it, you might think that those who were trading more actively would be more experienced, sophisticated and able to control themselves," the authors said. "But that seems not to be the case—trading becomes addictive. "This perspective has been reinforced recently by one of the world's most respected policymakers and astute observers of markets—Ian Macfarlane, the former governor of the Reserve Bank of Australia and now a director of ANZ Banking Group. In a speech in Sydney², Macfarlane made the point that the worst investors tend to be those who follow markets and the financial media fanatically, extrapolating from short-term movements big picture narratives that fit their predispositions. "Most people experience loss aversion," he said. "They experience more unhappiness from losing $100 than they gain in happiness from acquiring $100. So the more often they are made aware of a loss, the unhappier they become. "Because of this combination of hyper-activity, lack of self-control and loss-aversion, investors end up making bad investment decisions, Macfarlane noted. These behavioral issues and how they impact on investors are well documented by financial theorists. Commonly cited traits include lack of diversification, excessive trading, an obstinate reluctance to sell losers and buying on past performance.³ Mostly, these traits stem from over-confidence. Just as we all tend to think we are above-average in terms of driving ability, we also tend to over-rate our capacity for beating the market. What's more, this ego-driven behavior has been shown to be more prevalent in men than in women.

A study quoted in The Wall Street Journal⁴ showed women are less afflicted than men by over-confidence and are more likely to attribute success in investment to factors outside themselves – like luck or fate. As a result, they are more inclined to exercise self-discipline and to avoid trying to time the market. The virtues of investment discipline and the folly of 'alpha'-chasing are highlighted year after year in the survey of investor behavior by research group Dalbar.

The latest edition showed in the 20 years to the end of December 2010, the average US stock investor received annualized returns of just 3.8 per cent, well below the 9.1 per cent delivered by the market index, the S&P 500.⁵ What often stops investors getting returns that are there for the taking are their very own actions—lack of diversification, compulsive trading, buying high, selling low, going by hunches and responding to media and market noise.

So how do we get our egos and emotions out of the investment process? One answer is to distance ourselves from the daily noise by appointing a financial advisor to help stop us doing things against our own long-term interests. An advisor begins with the understanding that there are things we can't control (like the ups and downs in the markets) and things we can.

Some of the things we can control including ensuring our investments are properly diversified—both within and across asset classes—ensuring our portfolios are regularly rebalanced to meet our long-term requirements, keeping costs to a minimum and being mindful of taxes. Most of all, an advisor helps us all by encouraging the exercise of discipline—the key ingredient in building long-term wealth.

1. 'Risk and Rules: The Role of Control in Financial Decision Making', Barclays Wealth, June 2011

2. 'Far Too Much Economic News for Our Own Good', Ross Gittins, Sydney Morning Herald, June 13, 2011

3. Barberis, Nicholas and Thaler, Richard, 'A Survey of Behavioral Finance', University of Chicago

4. 'For Mother's Day, Give Her the Reins to the Portfolio', Wall Street Journal, May 9, 2009

5. '2011 QAIB', Dalbar Inc, March 2011

401k Lawsuits: DOL Gives Another 408(b)2 Extension-No Excuse to Procrastinate!

Charles Massimo — Wed, 03 Aug 2011 19:58:00 GMT

Last month, the Department of Labor extended the effective dates for two important rules regarding 401(k) plans subject to ERISA, the Employee Retirement Income Security Act of 1974. However, with 401(k) lawsuits on the rise, this is no time for plan sponsors and business owners to procrastinate. The effective date for the compliance deadline for the serviced provider regulations has been extended from January 1, 2012 to April 1, 2012. The date for initial compliance with the participant disclosure rules was extended to no earlier than 60 days following the effective date of the service provider regulations, that is, no earlier than May 31, 2012. The timing of the new effective dates is intended to assist plan fiduciaries and plan administrators in bringing into compliance contracts under Section 408(b)2 of ERISA before turning to compliance on participant-level disclosure, and to give more time to accomplish these tasks.

The issue of hidden fees and excessive fees is one that is gaining momentum as plan participants become more focused on their retirement plans. Plan sponsors will answer to irate employees if these sponsors do not take the initiative in ensuring reasonable fees are being paid to service providers for reasonable services.

Long gone will be the days of keeping a service provider or broker on a plan because of personal relationships, idleness or lack of awareness. Businesses can collapse under staggering litigation costs that can occur if the plan fiduciaries, who are often the business owners, do not administer the plan accordingly. As a fiduciary, you have an obligation to act solely in the interests of plan participants and beneficiaries,-not the company and not yourself-when making decisions about the plan.

You are held personally liable to the plan participants and beneficiaries for any errors, omissions or breaches in your fiduciary duty. According to a Tillinghast survey, 69% of substantive ERISA litigation in district courts is resolved in favor of plaintiffs and the occurrence of ERISA litigation is on the rise. Just because another extension has been given regarding up and coming disclosure regulations, rest assured you will be held accountable as a business owner, trustee or plan sponsor. It’s never been more important than now to be protected.

If you consider the possibility of the hiring of 17,000 new DOL agents and the need for money by our government the chance a DOL audit, or worse yet a 401k lawsuit have significantly increased, regardless of the size of your plan. Companies need to realize that it is essential they have lead time to become compliant with these new regulations before they are faced with fines, fees, legal action and outraged employees.

Top 7 Reasons Dimensional Fund Advisors is Unique!

Charles Massimo — Thu, 28 Jul 2011 17:18:00 GMT

Dimensional Fund Advisors is one of the largest independently owned institutional investment management firms in the world. They were rated the #1 mutual fund family by Barron’s and Lipper this year and they have stringent principles and beliefs that set them apart from the rest. Here are the top 7 reasons you should be choosing Dimensional Funds.

1. They have a clearly defined approach. Their investment approach is rational, structured and simple to monitor. Their goal is to keep everything transparent.

2. Distinct Investment Strategies. Dimensional does not actively pick stocks or passively track commercial indexes but instead structures portfolios based on risk and returns as identified through financial science. Their main objective is to help clients structure globally diversified portfolios and to increase returns through state-of-the-art portfolio design and trading.

3. Scientific Research as basis for their Investment Philosophy. Research by Professors Eugene Fama and Kenneth French identified equity market exposure, capitalization, and price relative to fundamentals as the 3 factors that primarily determine the returns of a broadly diversified portfolio. Their work has held up through rigorous open review and Dimensional strategies focus on their insight.

4. Combination of Theory and Practice. By acting as a conduit between financial economists and practicing investors, Dimensional has pioneered many strategies and consulting technologies now taken for granted in the industry. This makes for an exchange of ideas that allows Dimensional to position themselves at the forefront of innovative solutions.

5. Focus on Investing with Virtually no Style Drift. Dimensional believes that, over time, a well-structured investment approach will add value with a higher reliability and confidence level that one based on instinct and prediction. They adhere strictly to their asset class definitions. Portfolio managers are allowed to buy only those stocks that meet the defined requirements, and they have no financial incentive to deviate from this practice.

6. Low Costs. Their investment management fees are positioned well below those of traditional active managers. Their buy-hold approach and trading strategies are designed to minimize costs. Careful trading can reduce or even reverse the costs borne by traditional managers. Because Dimensional focuses on capturing the systematic performance of broad market dimensions rather than the random fluctuations of individual securities, they can keep costs low.

7. Broad Line of Complementary Strategies to Meet Your Ever-Changing Needs. Dimensional funds will allow you to gain exposure to asset classes around the world. Their goal is to provide investors with global investment solutions. They are also one of the largest providers of tax-managed mutual funds in the US. On top of that they have a unique approach to fixed income. Their approach seeks to maximize returns by using the information in the current yield curve to find the optimal maturity range instead of using interest rate forecasts or simple fixed maturity index schemes.

In conclusion,

A clearly defined approach
Distinct Investment Strategies
Scientific Research
Combining Theory and Practice
Focusing on Investing
Low Costs
Complementary Strategies

is what separates Dimensional Fund Advisors from the rest of the pack.

ABC News Says, “Clear the Fog on 401k Fees”

Charles Massimo — Tue, 26 Jul 2011 14:00:00 GMT

Many employees are truly unaware of the 401k fees they pay in their company’s 401k plan. For years, we’ve spoken about full disclosure and fee transparency, however, business owners have been either too busy or too lazy to act and plan participants continue to be kept in the dark. ABC News in a recent article, “Your 401(k): Clearing the Fog Around Returns, Fees”, has finally brought the issue of hidden fees to the mainstream.

In a study done by AARP, more than seven in ten, that’s 71% of 401k plan participants incorrectly reported that they did not pay any fees for their plan. The bottom line is you end up trying to plan for your retirement without all the information available. What this study shows is a clear lack of understanding about 401k fees and the impact that may have on one’s savings.

Plan participants need to focus on knowing the true return of their investments. Even thought the Department of Labor’s new 401(b)2 rule will be in effect in April, plan participants need to begin questioning their plan sponsor about hidden fees. Currently, it is extremely difficult, if not downright impossible, to get an itemized breakdown of all the fees passed on to plan participants.

The reason behind this is that the statements that investment companies send out typically show the value of accounts after fees are deducted, without itemizing them. Because of this, investors are clueless about the actual performance of their investments and how much they pay in fees. Current laws require the disclosure of some fees but not all. That means the necessary information is not readily available. You’re going to have to work at gathering the data, but it will be worth it.

The worse part is your employer probably won’t have that information readily available either because they are not aware of all the fees involved with the company plan. This is a critical issue since what you pay in fees, as an investor, can have a significant impact on your investment returns over time.

Another important point to note is the fact that many employees are not taking full advantage of their company 401k plan. “You can’t control investment performance, but you can control how much money you invest in your 401k from each paycheck. Markets have risks, but the biggest risk is failing to invest, setting you up to lag behind in the game of wealth accumulation”.

If you are participating in your company’s 401k plan, new Department of Labor disclosure rules will make it easier for you to make informed decisions about investment choices thereby allowing you to gather more wealth for retirement. However, making sure you’re involved in your company’s plan is a major step.

If you are not taking advantage of your firm’s 401k plan, you’re missing out on the employer match which is free money, and you lose the opportunity to lower your taxable income each year and invest more for retirement.

For a Free Evaluation of your 401(k) Plan. Contact Us or Download our Free 401(k) Hidden Fees Kit.

Fiduciary Responsibilities: Will the SEC Push to Protect Investors?

Charles Massimo — Mon, 25 Jul 2011 15:52:00 GMT

There has always been a gap between fiduciary responsibilities for brokers and fiduciary responsibilities for investment advisors. Dodd-Frank gives the SEC the authority to enact a universal fiduciary rule that would apply to brokers and investment advisors alike. As it stands, investors are often confused by different standards for investment advisors and broker-dealers. If a single fiduciary rule is enacted, brokers would have to put the interests of the client first. Right now only investment advisers have to hold fast to that standard and the broker just has to make sure the investment is “suitable”.

It’s been one year since the implementation of the Dodd-Frank Wall St. Reform and Consumer Protection Act.

However, we don’t seem any closer to actually having a rule put in place that will address what has been such a gray area for investors. The problem is that even though Dodd-Frank gave the SEC the authority to act, it didn’t state they have to act. More importantly, big Wall Street firms have been fighting this rule tooth and nail. It’s about time some guidelines were put in place since these major firms rip off investors with excessive fees for the products they offer. According to the Financial Planning Coalition, “the SEC should turn its attention to one of Dodd-Frank’s most critical investor protection reforms. Adopting a fiduciary standard would ensure that clients receive advice that is in their best interest, regardless of their advisers’ compensation or other interests.”

Aside from resistance from broker-dealers, the SEC also has to seek more funding to implement Dodd-Frank. Staff will be needed to handle the new law and unfortunately, the SEC currently doesn’t have the budget. Federal spending reductions make it currently impossible for the SEC to hire the 770 additional personnel that is needed. Many critics feel that the GOP is trying to starve agencies of the funding they need to implement Dodd- Frank.

In Investment News, SEC Chairman Mary Schapiro mentioned that an initial rule may be issued this fall imposing a universal fiduciary duty for anyone providing retail investment advice, but that only seems to be the first step it what will be a long journey to investors getting the protection they deserve. Since advisers have a fiduciary responsibility to the client, it would make you wonder why an investor would choose a broker that adheres to a much less stringent suitability standard when selling financial products?

401k Hidden Fees: Interview with IRS Enrolled Agent Rick Canipe

Charles Massimo — Thu, 21 Jul 2011 18:33:00 GMT

As you may know, 401k hidden fees affect many, if not most 401k plans. Over the past year, we at CJM Fiscal Management have been educating plan sponsors on the changes taking place in the 401k industry, and how to best prepare themselves, as well as minimize their fiduciary responsibility. Recently, I was able to sit down with Rick Canipe, Chief Compliance Officer at Millennium Advisors and an IRS enrolled agent. Here is what he had to say.

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Excerpt From the Above Interview:
Before we get started, can you tell us a little bit about your background, and howyou act as an independent fiduciary, as well as what it really means to be an IRSenrolled agent?
That's a good question. Most of the time you hear about the IRS, it's not a goodthing. But in 1884, congress formed a group of enrolled agents. Those that havea background investigation by the IRS and undergoes rigorous exams to bequalified to serve as a representative to the taxpayer. So they're there to protectthe plan, protect the fiduciaries of the plan. So it was a natural fit we serve as afiduciary under the tax code. So I serve as a fiduciary under the SEC rules andDepartment of Labor rules.
Great. Over the past few months or year, we've been hearing about all thesechanges that are taking place, especially around the new Department of Laborregulations 408(b)(2). Can you tell us a little bit about 408(b)(2), and how that'sgoing to play a role in the 401(k) market moving forward?

Great. Over the past few months or year, we've been hearing about all thesechanges that are taking place, especially around the new Department of Laborregulations 408(b)(2). Can you tell us a little bit about 408(b)(2), and how that'sgoing to play a role in the 401(k) market moving forward?

Another good question. There's enough rules in the 401(k) marketplace now. Wedidn't need any more, but congress felt that enforcement actions werenecessary. They felt they needed to have more teeth in the existing regs. So theydesigned a regulation that forces disclosures by service providers, and by theplan sponsors to those employees and participants who never knew how muchmoney they were actually paying in fees. So it's a fee disclosure act. And this wasgoing to be coupled with a contract act, but the contract is under a separatereview right now. So this is simply disclosing costs to employees andparticipants.

Retirement Income Planning: 6 Tips for Small Businesses

Charles Massimo — Thu, 14 Jul 2011 13:00:00 GMT

All too often, small business owners put off planning for their retirement. A study by The Guardian Life Small Business Research Institute found that less than half of small business owners feel like they’re prepared for the golden years. Here are 6 tips business owners can follow to prepare a comprehensive retirement income plan.

1. Start early! People should allocate at least 10% of their income annually towards retirement. This will differ depending on circumstances but the sooner you get started the better off you will be.

2. Prioritize. You have to make retirement income planning a priority. You don’t want to end up being taken care of by your children. People are living much longer so you have to start thinking ahead.

3. Identify assets. You have to have a clear understanding of where your retirement assets are going to come from. Many small business owners think they will have the sale of their small business to fall back on. Make sure you know what your business is worth and what you’ll net after all expenses.

4. Forecast. Try to estimate what you will need for retirement. Make assumptions and be realistic. Not only will this help you with plan selection, but it will help you determine what you need to put away for retirement.

5. Pick a plan. As a small business owner, you have several retirement plans to choose from such as a SEP, which is a simplified employee pension, an IRA and an individual 401k. Each comes with advantages and disadvantages, so do your homework, pick a plan and stick to it.

6. Be flexible. You may pick a plan early on that does not fit your needs down the line. Make sure to do an annual review of your plan and make changes as necessary.

In closing, following these steps

Starting early
Prioritizing
Identifying assets
Forecasting
Picking a plan
Being flexible

can mean the difference between having to work the rest of your life or being able to rest easy and enjoy the golden years. It’s never too early to start developing a retirement income plan. This week’s Newsday article “Small Business: Planning For Retirement”, provides additional retirement planning information.

Know Your 401k Fees: Good Advice From NY1

Charles Massimo — Tue, 12 Jul 2011 14:00:00 GMT

The fees charged in a 401k plan can have a significant impact on a plan participant’s retirement savings. Even a small difference in 401k fees can make a big difference in the overall size of a retirees final 401k account balance. A one percent difference in fees can reduce retirement benefits by nearly 20% over the course of a career, while a 2% increase in fees can reduce the participant’s 401k total by over 50%.

Tara Lynn Wagner of NY1 recently did a report encouraging employees to check Brightscope. Brightscope is an independent, third party rating agency that is fast becoming the “Consumer Reports” of the retirement plan space. They provide retirement plan ratings to participants, plan sponsors, business owners, asset managers and advisors nationwide. They review more than 200 unique data inputs per plan and devise a number on a scale of 1-100. The site is extremely user friendly and plan participants can see how their 401k plan fares in comparison to its peers.

Many people spend the time to see how much money they are making in their 401k, but few take the time to see what their 401k plan is actually costing them. Even though the Department of Labor has implemented new fee disclosure and transparency regulations that become effective January 1, 2012, plan participants need to be proactive in finding out all of the 401 k fees associated with their company plan. “It could be the difference between retiring at 63 or retiring at 75”.

For a Free Evaluation of your 401(k) Plan. Contact Us or Download our Free 401(k) Hidden Fees Kit.

Dimensional Fund Advisors: Evolving to Meet Changing Needs

Charles Massimo — Fri, 08 Jul 2011 20:15:00 GMT

Dimensional has always focused on designing innovative solutions to meet the needs of clients. The firm’s first strategy, a US micro cap stock portfolio, was launched when few, if any, dedicated portfolios or benchmarks existed for micro caps. This separated Dimensional Fund Advisorsas a pioneer. Their value strategies were developed to implement cutting-edge research, allowing them to act as a conduit between financial economists and practicing investors.

Their core equity technology came from the changing investment goals of clients and Dimensional Fund’s dedication to their clients. They have also been able to bring many new ideas to their investment process all while their portfolio methodology has evolved over time. Changes at DFA can be driven by new research, natural evolution in the markets or developments in the needs of clients. As these drivers of changes occur, their thinking can evolve, and they are always ready to implement new ideas if they can enhance their overall strategies.

Dimensional’s driving force is their commitment to consistent values and beliefs. One of their guiding principles is to act in the best interest of clients, earning and maintaining trust by doing what they say they are going to do. They follow that principle by adhering to a core philosophy that forms the foundation for all portfolios they manage. For example, they believe that risk and return are related and that prices in liquid and competitive markets reflect all available information. Consistency in certain elements of their investment approach also keeps them centered on this guiding principle. They focus on delivering asset class returns for their clients. Dimensional uses its own definition of asset classes, built with flexibility in order to address the needs of individual market universes. They make diversification at all levels an essential feature in their portfolios. They also add value by emphasizing careful and efficient management and trading in the portfolios. The patient and flexible approach to trading focuses on price rather than time of execution, keeping portfolio turnover low and minimizing trading costs. Reduced trading costs and other beneficial implementation strategies enhance portfolio returns.

Another of the firm’s guiding principles is to work hard to improve returns and challenge existing assumptions. They regularly consider new ideas and undertake new research. They study new ideas carefully and implement them in an existing strategy only when they believe a proposed change is expected to enhance returns or improve risk controls while keeping the strategy focused on its objective. In other cases, they seek to improve the operational efficiency of their portfolio management process, or they may use the results of their research to launch new investment solutions.

Making efforts to continually improve their strategies is a critical way that DFA adds value for clients. This ongoing evolution in their investment process makes them a tough act to follow. They are always looking for ways to improve, from design to management to implementation. However, at the foundation of any change is the core philosophy that Dimensional is built on: markets work, risk and return are related and diversification is key. They always strive to find the balance between core consistency and improving their ability to deliver investment solutions. The investment world had evolved, and investors are seeking advice that goes well beyond the search for a hot investment tip and Dimensional Fund Advisors aims to deliver.

401k Audits: Charles Massimo Featured in Long Island Business News

Charles Massimo — Fri, 01 Jul 2011 15:16:00 GMT

Most business owners continue to be oblivious to the “true” fees they are paying within their 401k plans even when 401k audits are performed. Unfortunately 1/3 of all ERISA audits have deficiencies. This leaves business owners, trustees and plan sponsors exposed to personal liability if they violate their fiduciary responsibility and plan participants bring hefty lawsuits. Today, even one complainant can constitute a class action suit.

Nevertheless, what business owners should truly be fearful of is a Department of Labor 401k audit. The top reason: the fine for plan trustees found in violation of 408(b)2 is 15 % of the plan’s assets: if the prohibitive transaction is not corrected in the same calendar year, the fine is 100% of the plan’s assets. “This could put companies out of business. This will put companies out of business.”

The article, “Looming 401k Plans”, describes in detail what companies can expect as DOL deadlines are fast approaching. We also explain steps to protecting you and your company.

The 401k Workshop on June 22 at Westbury Manor was very successful and the business owners and CPAs that attended should be commended. However, “I am still shocked that more people aren’t paying attention”. The danger for many plan trustees, sponsors and business owners is relying on their existing plan providers or advisers who often assure them that their fees are reasonable. According to Ary Rosenbaum, an ERISA and retirement attorney, “I’ve seen too much in this industry of hiding the ball,” noting situations in which administrators might steer plan sponsors to put their 401k plan in a specific mutual fund family only to pocket the hidden fees through revenue sharing. In the last year, 1500 lawsuits have been filed by plan participants.

Business owners can take several steps to begin to protect themselves. They can begin an annual process of comparison shopping. It’s actually their fiduciary duty to do so. More importantly, they can delegate responsibility to an independent, unbiased fiduciary. Lastly, firms should have an independent company come in to conduct a full, independent analysis and audit of the plan.

Wealth Management Firms with Top Advisors: Top 10 Success Qualities

Charles Massimo — Thu, 30 Jun 2011 13:00:00 GMT

A good financial advisor will make you feel relaxed, will listen intently and interpret your needs. Top wealth management firms have advisors that possess certain traits that set them apart from the rest. Here are our top 10 attributes which comprise a top financial advisor.

1. They put your interests first - Professional advisors tailor your plan to meet your goals. They don't push products on you simply to meet quota or to get the biggest commission. Check whether your advisor represents a wide range of products and service options or if they're restricted to only proprietary solutions their company sells.

2. Excellent Communication skills - He or she must be able to listen actively, convey information effectively, and communicate information and ideas so their clients will understand it. Good advisors keep the lines of communication open, updating you on current financial issues and opportunities.

3. Extremely Patient - An advisor that calls you with urgent hot stock picks does not have your best interests in mind. There should be no sense of urgency when it comes to sound investing that leads to long-term growth. Finding an advisor who is patient and doesn't panic is critical to success.

4. Trustworthy/ Dependable - If you are feeling nervous, fearful, or stressed energy when around an adviser, trust your instincts and get the heck out of there. Advisors are responsible for the advice they give and the strategies they recommend. They must consistently do what they say they are going to do within a set timeframe. And they must always disclose the advantages and disadvantages of the each investment option.

5. High level of Integrity/ Honesty - Success as a professional financial advisor means conducting yourself with integrity and honesty and behaving ethically it’s not just about the money.

6. Very Reputable/ Experienced - Getting a strong referral from a friend or family member can be the first step in finding the right financial advisor. All legitimate financial advisors should have significant experience in the financial services industry. Whatever the case, be sure to verify your advisor's experience and credentials. Do your due diligence; it's your best protection to ensure you're dealing with a reputable advisor.

7. Highly Disciplined - You want an advisor who is always evaluating what options are best for you, but does not divert from a well thought-out strategic plan.

8. Willing to Educate – An advisor that withholds information or doesn’t take the time to teach you the basics is not a good one. Your financial planner should want you to know as much as they know.

9. Analytical thinker - We all have access to pretty much the same investment information. What separates the pros from the novices is the ability to logically analyze that information using specific knowledge and skills. No one can predict the future as our volatile economic times show us but good financial advisors can look at financial data and make the kinds of recommendations that help clients reach their financial goals.

10. They work with you - A good financial advisor will meet with you regularly throughout the year. That level of attention should continue every year of your relationship. Too many times, people meet with an advisor; develop a plan, and then simply get statements in the mail. In closing:

They put your interests first
Excellent Communication skills
Very Patient
Trustworthy/Dependable
High level of Integrity/Honesty
Very Reputable/Experienced
Highly Disciplined
Willing to Educate
Analytical Thinker
They work with you

These are the traits you should look for when looking for an exceptional financial advisor from a top wealth management firm. If you already have an advisor, always feel free to seek out second opinions. You are ultimately in charge!

Part IV: 401k Hidden Fees - You Pay for Everything!

Charles Massimo — Tue, 28 Jun 2011 20:21:00 GMT

It’s no secret that creating awareness of what’s been happening in the 401k market is imperative to plan participants preserving their retirement income. The US Labor Department is currently doing 401k audits of all plan sizes because of a trend that may violate current pension laws. Because of lax reporting requirements, no one really knows how much money changes hands behind the scenes, but it is estimated that excessive fees may be as much as $1.5 billion per year, and growing. As our series continues, here are 4 more fees that may be chomping away at your hard-earned savings.

14. Installation fees-Some plans may charge you what they consider an initial set-up fee or installation fee. This is the cost of getting the ball rolling and actually implementing the 401k plan. It can also be charged if you are adding a new service. If you already have a plan in place, this may be in the form of a conversion fee.

15. Enrollment expenses-This is the costs associated with providing materials to educate employees about the plan and enrolling employees in the plan. This may be part of, or included in the education programs.

16. Loan fees-These can include loan maintenance/repay tracking fees, loan origination fees, and loan processing fees. Allowing loans within a 401k plan is allowed by law, but an employer is not required to do so. Many small businesses just can't afford the high cost of adding this feature to their plan.

17. Termination fees- There can be product termination charges as well as contract termination charges, not to mention a service provider termination charge. Contract termination charges occur to the plan for “surrendering” or “terminating” its insurance/annuity contract prior to the end of a stated time period. The charge typically decreases over time. Product termination charges are investment-product charges associated with terminating one or all of a service provider’s investment products. Service provider termination charges are plan administrative costs associated with terminating a relationship with a service provider, with the permanent termination of a plan, or with the termination of specific plan services. The key is to read the fine print and make sure you are aware of what the cost of implementing change may be.

In the 401k arena, expense fee disclosure, whether to plan participants or plan sponsors, has been notoriously confusing and unclear. The impact of these confusing hidden fees on plan participants' retirement accounts can be very significant over time. What might appear to be a small difference in deducted investment fees can result in substantial differences in eventual retirement benefits.

Taxes on Retirement Income: Young and Wealthy Start Planning Now

Charles Massimo — Fri, 24 Jun 2011 19:54:00 GMT

Many investors wait until their golden years are fast approaching before they truly begin to devise a strategy to minimize taxes on retirement income. The fact of the matter is you are never too young to start thinking about ways to keep more of your money in your pocket.

Wealthy individuals in their 30’s and 40’s should start to take some simple measures to make certain they can continue to enjoy the standard of living they’ve become accustomed to.

By planning ahead, you can minimize taxes and avoid costly penalties when the time comes for you to withdraw money from your retirement plan. Here are some general tax rules everyone should be aware of to avoid penalties and follow IRS regulations regarding employee sponsored plans.

If your firm has a 401k plan, make sure you’re contributing to it.

The younger you are the further away this thought is, but it’s one of the quickest, smartest ways to accumulate wealth.
With that in mind, you must decide hot to take retirement income when the time comes.
You’ll want to avoid the penalties for withdrawing money before you turn 59 ½ or perhaps more important, for taking too little each year after you turn 70 ½.
You’ll also want to minimize the income taxes you’ll owe.

In addition, some employees now offer what’s known as a Roth 401k.

This type of plan allows you to make contributions with after-tax dollars that can grow tax-free.
The main difference between a Roth 401k and a traditional 401k is that you won’t pay taxes on money you withdraw as long as your account has been held for at least 5 years and you are at least 59½.
You will need to begin taking minimum distributions by the time you reach 70½.
However, if you leave your job, you can roll your Roth 40lk over into a Roth IRA which has no required withdrawals.
This rollover feature for the Roth offers a way around the distribution requirements if you’re planning to leave the account to an heir or if you simply don’t want to withdraw money by age 70 ½.

There are also several different ways that you can make withdrawals from your 401k. You can do a direct rollover into an individual retirement annuity.

This way you can maintain the tax-deferred status of your account. You’ll owe income tax at your regular rate on your withdrawals as you make them not to mention being able to invest the assets in the separate accounts offered in your contracts.
With an indirect rollover, you decide to move the money yourself into an IRA. You’re employer now has to withhold 20% and sent it to the IRS. You’ll receive the amount that's withheld after you file your next tax return, provided you have deposited the entire value of your withdrawal including the 20% that was withheld into the IRA within 60 days.
A huge disadvantage of this method is that the amount that's withheld - the 20% - is considered a taxable distribution if you don't deposit the full amount within the required period.
However, an advantage is that you will have the use of this money for the 60 days between taking it out of your retirement account and the deadline for depositing it in your IRA. As an example, if you have $100,000 in a company plan and do an indirect rollover, the company must withhold $20,000 and gives you $80,000.
You must still deposit $100,000 in the IRA within 60 days to avoid taxes and penalties. That means you'll have to come up with $20,000 from other sources, such as an investment account or additional savings. If you deposit only the $80,000, you'll owe income taxes on the $20,000 that was withheld.
If you are younger than 59½, you may also owe a 10% early withdrawal tax penalty of $2,000. And once you miss the deposit deadline, the tax-deferred status of the money you don't deposit is gone forever.

You can also do what is known as a lump-sum withdrawal, where you’ll receive all the funds at once.

This can result in a significant tax bill especially if you’re in a high tax bracket.
As a young investor, you need to remember that if you withdraw money from an employee’s retirement plan before you turn 59 ½ without rolling it over into another tax-deferred plan, you will pay a 10% tax penalty.

Lastly, keep in mind that the law requires you to begin withdrawing money from your employer-sponsored retirement savings plan by April 1 of the year following the year in which you turn 70½, unless you are still working.

In that case, you may postpone withdrawals until the April following the year you actually retire.
That exception doesn't apply to withdrawals from traditional IRAs, which must begin when you turn 70½, or if you own 5% or more of the company where you work.
If you don't take the required minimum each year, you owe a penalty of 50% of the amount you should have withdrawn but didn't.

Remember, there aren’t many guarantees in life, but rest assured paying taxes are a sure thing. The younger you are when you begin planning ways to retire comfortably and minimize taxes, the better off you’ll be. Taxes on retirement income, if not managed correctly, can chip away at your savings. After working hard all of your life that’s the last thing you want. Be smart, start early and plan ahead!

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Dimensional Fund Advisors and 401(k)s: What a Match!

Charles Massimo — Fri, 24 Jun 2011 00:41:00 GMT

Dimensional Funds has been at the core to the structured approach that we use for investing. More importantly, we have spearheaded efforts to educate plan sponsors, business owners, plan trustees and plan participants about the hidden fees that can be found in 401(k) plans and how these fees can diminish retirement savings.

A recent article in the NY Times, “The Search for a Better 401(k) Plan-Your Money”, came as no surprise. The story speaks of Alan Wenker, the controller for a small company in Minnesota who set out on a 10 year mission to find a better 401k plan for himself and about 25 other employees. Why did it take so long? Alan found himself up against many obstacles in his pursuit of a better plan. The first hurdle was figuring out all the excessive fees and costs that a plan can possess if you are not informed and not asking the right questions. The second hurdle was realizing that, “most actively managed mutual funds, which try to pick investments that will do better than an index of similar securities, often don’t actually outperform that index over long periods of time.” He soon found that most of the brokers he encountered were essentially all the same, offering all the same type of mutual funds that benefited the broker more than the client.

Alan soon came to realize the importance of diversification and low costs, two of the philosophies strictly upheld by Dimensional Fund Advisors. What did Alan Wenker find when he put in a call to DFA? He found that within a year he had a new 401k plan that offered him better funds, personalized advice and the best part of all, an overall cost that was more than 50% less that what he had been paying before.

Top 5 401k Lawsuits and Fiduciary Responsibility Articles

Charles Massimo — Fri, 17 Jun 2011 14:54:00 GMT

New Department of Labor regulations regarding fee transparency for 401k plans are fast approaching. Many business owners, plan sponsors and plan trustees will find themselves scrambling to be compliant as they continue to put off taking the necessary measures to protect themselves from fines and 401(k) lawsuits. The effective date for sponsors to disclose all fees and expenses to participants is January 1, 2012.

Even though the DOL is giving employees 120 days after the effective date (originally it was 60 days now it’s until April 30, 2012) to issue the first disclosures, don’t wait until the last minute to begin questioning your existing plan. Even if you’ve recently changed plans, understand that a second opinion goes a long way to making sure that the changes you incorporated have lowered your fees, reduced your fiduciary liability, have addressed conflicts of interests and prohibited transactions and are in the best interests of employees.

1. “Does Pending Appeal Decision Doom 401k Plan Sponsors” warns plan sponsors to be aware of “fee creep”, the cause for a lawsuit against fiduciaries in the Tibble vs. Edison case.

2. The NY Times article, “Revealing Excessive 401k Fees”, is bringing to light what we’ve been saying all along, hidden fees in 401k plans are ruining efforts for hard-working individuals to truly save for their retirement.

3. Again, Ron Lieber of the NY Times, addresses the importance of being conscious of what your 401k retirement plan is actually costing you and not being afraid to ask questions in the piece, “Revealing Hidden Costs of Your 401(k)“.

4. Dan Solin, in “401(k) Participants Need an Arab Spring”, tells what is necessary in a 401k plan for plan participants to receive a satisfying outcome.

5. “Failure to Act Triggers ERISA Liability”, lets plan sponsors, CFOs, business owners and plan trustees know that indecision is a decision in and of itself.

Dimensional Fund Advisors: Managing Investment Risks for Clients

Charles Massimo — Thu, 16 Jun 2011 15:18:00 GMT

Investing always involves varying degrees and types of risk. However, the key is to minimize the risks which are controllable. Operational, concentration and implementation risks are 3 areas Dimensional funds have focused on in order to ensure the best possible outcome for the client. Here are some specific measures the firm uses to contend with these risks.

Operational risk came into the spot light during the 2008 financial crisis. As scandals were exposed this risk became increasingly more apparent. Many questions were raised about the security of investor assets and independent auditing of investment managers’ systems and processes. Operational risk management is implemented across all offices in Dimensional. Being a global firm with offices in several countries, the firm must adhere to regulatory requirements. The two most important are the Securities and Exchange Commission and the Financial Industry Regulatory Authority in the US. Dimensional conducts an annual compliance review exam that looks at elements such as supervisory controls and any impact from change in regulations. This ensures that at all times each group is following company and government policies.

Concentration risks can occur in numerous ways. Most commonly this risk occurs in strategies with a small number of holdings. Even a diversified strategy could become concentrated in a small number of holdings or in a few sectors or countries if the strategy does not control for these risks. It is of utmost importance that investors are aware of what their managers are doing to identify and manage concentration risk while maintaining the objective of the investment strategy. In an attempt to manage concentration risk, Dimensional is diversified across a number of areas including, securities, industries, countries and currencies. Every strategy has guidelines designed to limit the risk of concentration and maintain diversification.

Investing in a large number of countries further diversifies Dimensional’s multi-country strategies, which are designed to provide exposure to developed markets or emerging markets worldwide. Controlling for country-specific risk has been particularly important historically when investing in emerging markets. Many emerging market countries have experienced greater volatility and political risk than developed market counties. Dimensional currently uses a market capitalization weighted method in its emerging markets strategies. This approach allows Dimensional’s strategies to maintain country weights that are similar to the natural market weights, with the advantage of minimizing the risk of significant concentration in a few counties.

Just like equity strategies, diversification is a key risk control element in Dimensional’s fixed income strategies. Dimensional places limits on the amount of bonds that can be owned in each tier whether a high-quality investment-grade tier or a lower-grade tier. This ensures that client assets are protected at all times. Currently, the firm’s fixed-income strategies cannot purchase bonds below investment grade, and several strategies only purchase high-quality bonds. To address liquidity risk, Dimensional focuses on liquid fixed income securities that can be traded efficiently. To ensure the strategies remain focused on their objective they are monitored on a regular basis.

More recently, investors have become aware of implementation risk. This is due to the wave of financial and political crises throughout the world. The risk has become extremely important for managers investing globally. Directly accessing many different local markets and maintaining the ability to trade efficiently throughout unexpected events are two important examples. Dimensional believes that in order to diminish implementation risk each team must use a portfolio management and trading process that do not rely on specific individuals. This method has led to low turnover among its investment professionals. When a departure does take place the team approach significantly minimizes the potential of any negative impact.

Dimensional invests directly in most countries, including many emerging market countries, through the local exchanges. To help reduce the risks in direct market access, the firm conducts rigorous analysis and requires a minimum market capitalization and ample liquidity before approving an exchange for trading. This practice allows the strategies to gain exposure to the performance equities across many countries while avoiding potential risks in some of the local exchanges.

In conclusion, it is most important to remember that DFA’s main goal is to mitigate risk while delivering access to asset classes in a cost-efficient way that adds value to the client’s portfolio. Dimensional uses specific measures to help manage operational, implementation and concentration risks and deliver investment solution for clients which is why they are one of the fastest growing investment firms currently the 10 largest and ranked the number one mutual fund company world-wide.

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Wealth Preservation: 8 Threats to Portfolio Performance

Charles Massimo — Tue, 14 Jun 2011 15:20:00 GMT

The last decade has been very challenging for investors. More recently, market confidence is dwindling and wealth preservation is the top priority for most. These 8 threats are why investor’s portfolios may underperform in both bear and bull markets and incur substantial costs in the process.

The Expenses of Active Management. A lot of time and money is spent attempting to “beat” the market. Active mutual fund manages are typically compared to a benchmark index. To beat the index, an active mutual fund must perform better than the weighted average return of those companies in the index. And they must do so while including fees, taxes, trading costs, etc. so they report a real rate of return.
Many Active Mutual Fund Managers Have Failed to Beat the Market. A 2008 research study concluded that after expenses, less than 1% of active mutual funds actually outperformed the market through the money manager’s skill.
Few Active Mutual Funds Have Outperformed in Bear Markets. If Wall Street experts can’t even predict recessions or the direction of the market, it is questionable how active managers can successfully pick individual stocks, in bear markets or bull markets, especially since a stock’s performance is often very sensitive to economic and market conditions.
Only a Few Stocks Have Generated Strong Long-Term Returns Over the Last 20 Years. The only way you can be assured of owning all of tomorrow’s top-performing stocks is to own the entire market, since past performance is not indicative of future results.
Missing the Best Days in the Market Can Lower Returns. No one knows when those “best days” will happen, yet some people prefer to try and ride out a bear market by pulling out of the market or just staying uninvested on the sidelines. If this is your strategy, you’re missing out.
Lack of Patience and Discipline Can be Costly. Up and down markets can be emotional events, but letting emotion effect your investing can be very damaging.
Lack of Diversification. Investment success has less to do with how well you pick individual stocks or the timing of the markets but depends more on how well your portfolio has been diversified. Investors who are not properly diversified may have more risk in their portfolio or are taking risks that they are not properly compensated for.
No Plan. As the saying goes; “Failing to plan is planning to fail.” If you don’t know where you are going, how are you going to get there?

Wealth preservation entails being aware of all of the above and making a conscious effort to stay focused and disciplined. Protecting your wealth seems to have been forgotten as investors looked to make large capital gains. An investor must always be prepared for the rainy days and this is why investment portfolios and your wealth should always be truly diversified.

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Revealing Excessive 401k Fees: Why Fees Matters

Charles Massimo — Wed, 08 Jun 2011 15:27:00 GMT

On June 3, the New York Times released yet another article on 401(k) fees. We have been at the forefront of trying to educate business owners, plan sponsors, trustees and the like of their exposure to lawsuits, not to mention the detrimental impact these hidden costs have on retirement savings.

The piece mentions a suit filed by employees of a company called ABB in Kansas City who argue that their 401(k) plans were too costly and managed poorly. One morning, one of the plaintiffs not only killed himself but his supervisor and two other colleagues at work. Even though the case hasn’t been settled yet, many are keeping a watchful eye since so much is at stake for millions of Americans. For many people in the country who are unemployed, the sum of their 401(k) plans are their biggest assets. It is of high importance that employers share with their employees the fees in such plans. The more information disclosed the better.

To make it short and simple, the higher your total fees the less money your 401(k) will have. It is of utmost importance that employees are aware of these fees and how even just a 1% increase can result in a loss of thousands of dollars. Fees always matter, and the younger you are the more you should be aware of them. Young employees should make sure that their employers are fully aware of how these costs can affect them in the long run.

Fortunately, starting on January 1, 2012, investment firms and other companies like Fidelity will need to be clearer with employers about how they are charging them. This might be a harsh wake up call to all those involved but in the long term it will only keep the company from avoiding lawsuits and ensure maximum wealth to employees.

In summary, just a quarter of a percentage point in annual savings now can mean tens of thousands of dollars more at retirement. Check to see if your firm’s retirement plan is benchmarked. Brightscope has made this relatively easy and provides a score on over 47,000 plans. You can also run personal fee reports on the mutual funds in your plan. Be aware of administrative costs and recordkeeping costs and make sure no kickback or revenues-sharing is involved. You have a right to ask questions and demand answers!

Comprehensive Wealth Management Program: Market Volatility & Uncertainty

Charles Massimo — Tue, 07 Jun 2011 15:21:00 GMT

Markets go up, markets go down, they trade sideways, they do nothing and investors get scared and make investment decisions based on fear. The best way to navigate through turbulent times is to have a comprehensive wealth management strategy in place. On Wednesday June 1, due to an on slot of negative economic data, the Dow dropped over 275 points. This had many of your most bullish investors and traders very concerned that the upswing we’ve been experiencing in the market for the past 2 years may be over.

Fear is one of the most powerful reactions we as humans can have. Fear can make people do crazy and or stupid things and it’s these extreme reactions that can cost investors. What has to be understood is that while most of us would like to beat the market, even financial professionals have a hard time performing better than the market. After expenses, only .6% or 1 in 160 of active managers actually outperformed the market through skill. Think of the cost involved in trying to find that needle in a haystack.

When you adhere to a comprehensive wealth management ideology, what is needed first and foremost is discipline and patience. When you try to move all your money around based on what you believe is a bear or bull market, you end up missing out not just on down days but on some of the best bull days as well. This mistake can be dangerous to your wealth. You also need to have a portfolio that is well diversified. Though diversification does not guarantee a profit or protect against a loss, a combination of asset classes may reduce your portfolio’s sensitivity to market swings.

Planning, especially done with professional help, can make a real difference. 90% of investors with a comprehensive investment plan feel they have a clear financial direction. Outlining your goals, identifying your risk tolerance and staying focused on your investment strategy through bull and bear markets and strong and weak economic environments will allow you to reach your long-term goals while minimizing your costs making for a much more successful investment experience.

Avoid a 401k Plan “Swoop & Kill”: 17,000 Agents Being Hired?

Charles Massimo — Wed, 01 Jun 2011 14:34:00 GMT

Many plan sponsors may not be aware that the Department of Labor and the IRS may hire 17,000 new agents in an effort to regulate prohibited transactions in 401(k)s. If you are overpaying for services, this can create a conflict and excessive cost leading to a 15% excise tax or more.

If your retirement plan has these 7 elements, you are on your way to avoiding a “Swoop & Kill” which can cost you and your firm dearly if your 401(k) isn’t up to standards.

In summary they are:

Low costs.
Strong participation rates.
High contribution rates.
Unique and cost effective investment opportunities.
High participation understanding and education.
Diverse fund line-up.
Leadership support, monitoring and guidance.

There are many more fundamentals that successful retirement plans share, but these will put you on the right track to a fund that scores high when benchmarked against its peers, a service provided by Brightscope, which is fast becoming the “Consumer Reports” of 401k plans. These traits will also lead to minimized costs and uncover any and all hidden fees which will help plan participants retain more of their savings.

Lastly, these characteristics of a successful retirement plan will allow you to steer clear of the IRS and DOL’s prying eyes. With new 408(b)2 regulations coming into effect on January 1, 2012, if you are not having your plan evaluated by an independent, unbiased third party then you better prepare for the IRS, the DOL or both to come knocking.

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Dimensional Funds: Always Putting the Client First!

Charles Massimo — Fri, 27 May 2011 16:40:00 GMT

It’s no secret that Dimensional Funds has been increasingly gaining popularity. Though the company formed its institutional strategies in 1981, they often flew under the radar since people were more familiar with names such as Vanguard or Blackrock. Dimensional is more widely acknowledged for its practical application and influential financial research.

The firm initially launched its strategies based on research into the performance of small cap stocks. Later, a comprehensive analysis of stock price behavior for the entire universe of US companies deepened their strategy repertoire and Dimensional Funds set a new standard for performance measurement and portfolio design.

By virtue of dismissing stock picking and market timing, Dimensional is not an active investment manager, yet at the same time it is not an index manager. They developed their own definition of asset classes and are not restricted by the mandate of tracking. This flexibility has allowed Dimensional to add substantial value to their investors.

With that being said, Dimensional Fund Advisors has taken it a step further. A recent piece, “Report Chides Vanguard and Others for Being ‘Excessive CEO Pay Enablers’”, mentions how big mutual fund firms such as ING, Vanguard, and Blackrock, to name a few, tend not to vote against management-initiated compensation proposals at companies that are part of their funds’ portfolios. To read more… Vanguard for instance supported 98% of the votes and was the worst ranking fund shop. This was based on a study done by the AFSCME, which is the American Federation of State, County and Municipal Employers. They represent 1.6 million state and local government, healthcare and child care workers and retirees. Basically, even though these mutual funds have a lot of influence, they are not using it to the advantage of their investors. The largest mutual funds are the least likely to line up executive pay with performance. It’s just another example of Wall Street executives lining their own pockets. Sorry to say, they now have the help of the largest mutual fund companies as well.

Dimensional Fund Advisors, on the other hand, was among the fund families most likely to vote to rein in pay or who were consistently challenging executives’ pay. They vote 88% of the time for shareholder proposals that are designed to tie executive compensation to long-term performance. Not only that, Dimensional Fund Advisors also votes against all directors sitting on compensation committees at companies with pay problems. This comes as no surprise considering their philosophy is that you always want your client to have a meaningful investment experience. It’s no wonder Barron’s ranked them the #1 mutual fund company in the world!

Don’t Miss Charles Massimo on the Bill & Joel Radio Show Discussing 401(k) Hidden Fees and the Effects on Your Retirement Income

Charles Massimo — Thu, 26 May 2011 16:46:00 GMT

USA Today recently reported that retirement savings are on a major upswing as balances reach a year high, averaging $74,000. But how are 401(k) Hidden Fees affecting your retirement income? There are two sides to this story. “It’s great that more people are saving, but when you think about it, ‘Who can survive off of $74,000 when they retire?’ People just aren’t’ saving enough and they should take full advantage of their firm’s 401(k) plan.

However, hidden fees which are buried in these 401(k) plans are diminishing plan participant’s account balances. Don’t be a victim! Go to human resources, your company’s owner or upper level management and find out what your plan is truly costing you. With new 408(b) 2 Department of Labor Regulations taking effect January 1, 2012, service providers will have an obligation to show all hidden fees. The problem is will that be too late for many existing 401(k) plans?

401k Fees and 401k Lawsuits: Could Your 401(k) Plan Be Illegal If You Don’t Offer Index Funds?

Charles Massimo — Tue, 24 May 2011 14:57:00 GMT

You’ll notice that for quite some time there have been articles and pieces regarding 401(k) hidden fees, prohibited transactions, conflicts of interests and 401(k) lawsuits on this site. Many of the discussions have focused on fiduciary responsibility and liability, not to mention the compounding negative effect excessive fees can have on a plan participant’s ending 401(k) balance.

Dan Solin’s recent piece, “Your 401(k) Plan Could be Illegal”, really drives the point home that as a plan sponsor you have a “fiduciary duty to act in the best interest of the plan’s participants”. He stresses the fact that index funds or a passive investing approach is really the only investment option plan participants should have that will generate the highest rates of return at the lowest costs. More importantly an “even better option would be for the plan to offer broadly diversified portfolios of these funds for varying risk levels”. This is exactly the type of plans we construct at CJM because we realize that aside from having to work most employees are not investment experts. Few of them have the ability and know how to construct a portfolio on their own that meets their criteria without professional advice. Unfortunately, this professional advice is usually minimal when it comes to the company’s 401(k) plan.

Ron Lieber also mentioned in a recent NY Times article, “Why 401(k)’s Should Offer Index Funds”, that too many employees must choose among actively managed funds when index funds are a much better option. That’s why we use DFA funds for our plans here at CJM. “While a judge has apparently never directly addressed {at least not yet} whether a lack of index funds in a 401(k) plan may make it illegal, the people who oversee the retirement plans do not need to wait for a lawsuit to give employees the index investing option.”

There are so many reasons why you should introduce index funds to your firm’s 401(k) plan. Mutual fund companies except for a select few such as Dimensional Funds, which we have the privilege of using, want participants to use actively managed funds because of higher expense ratios. Revenue sharing also comes into play and is offered by mutual fund companies as an incentive for plan sponsors and their financial advisors to choose their funds for a 401(k) lineup. Ary Rosenbaum’s article, “Introducing Index Mutual Funds to 401(k) Plans”, offers great insight into why it is your responsibility as a plan sponsor to offer index funds in your firm’s plan. By not doing so, you could end up with a 401(k) plan that may be illegal!

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Why I Went Independent: Charles Massimo

Charles Massimo — Fri, 20 May 2011 16:23:00 GMT

Change can sometimes be difficult, but most often it’s well worth it! When I decided to go independent, I realized I could be an individual building a business based on my own core values and not a broker from one of the “big firms” that have a tendency to put their interest ahead of the clients.

I knew that each client is different and I wanted to be able to treat my clients as individuals tailoring a program that met each of their unique needs. Ours is a disciplined approach to wealth management, and one grounded in communication. Acting as your family’s personal “CFO”, we become intimate with your financial objectives, the aspirations you have for your family, and the future you hope to build.

Inflation and Retirement Income: Charles Massimo on the Jim Blasingame Radio Show & the Sean Herriott Radio Show

Charles Massimo — Fri, 20 May 2011 16:03:00 GMT

Charles on the Jim Blasingame Radio Show
With the recent volatility in the stock market, many investors are concerned about their retirement savings. Without developing a prudent investment strategy, many investors succumb to fear which causes them to make bad investment decisions. On the Jim Blasingame show, you’ll hear specific ways to protect and grow your retirement income.

Click player below to listen:

Charles on the Sean Herriott Radio Show
On the Sean Herriott Show, we’ll focus on inflation and how you should be concerned about the purchasing power of your savings. The bottom line is you need to focus on building a globally, broad-based diversified portfolio. You won’t completely get rid of volatility, but you can minimize risk by diversifying it away.

Click player below to listen:

401(k) Lawsuits: Top 10 Duties of Your Fiduciary

Charles Massimo — Thu, 19 May 2011 16:10:00 GMT

If you haven’t been aware of all the recent 401(k) lawsuits, your company may be one of many who will be targeted by the Department of Labor and IRS. The old saying, “knowing is half the battle” is the key to making sure that you are compliant with new DOL regulations that could leave you exposed to extreme personal liability if you are a plan sponsor, business owner, plan fiduciary, CFO or trustee.

Unfortunately, many plan sponsors make the mistake of assuming their record keeper, third party administrator and even their investment advisor has taken on fiduciary responsibility or liability only to find this couldn’t be farther from the truth. Most record keeper/TPAs or brokers/advisors would not take on the responsibility of being a 3 (38) or 3 (21) fiduciary. The bottom line is they cannot and would not want to because it’s too much liability.

A plan fiduciary has certain obligations and functions they should perform so that they are offering the best possible plan, with the lowest possible fees thereby reducing the plan sponsor’s liability exposure and the exposure of the firm.

Here are 10 tasks you should make sure anyone who is labeled your plan fiduciary is performing. This is a good starting point to guarantee your firm is compliant with new regulations, that plan participants will be satisfied and to safeguard against costly 401k lawsuits.

Handle any and all Department of Labor Subpoenas.
Handle any and all IRS examinations.
Assist in any IRS or Department of Labor CPA audits.
Identify and address any Conflicts of Interests to reach a resolution.
Identify all Parties of Interest and Develop a Conflict of Interest Policy.
Develop, Complete and Issue all 408 (b)2 Model Disclosure Forms.
Complete all Annual DOL Fee Disclosure Forms.
Provide plan sponsor with the Investment Policy Statement and update accordingly.
Ensure all policy committee meetings are documented.
Monitor the record keeper and third party administrator.

17,000 new agents are currently being hired by the Department of Labor to investigate prohibited transactions. If your plan’s fiduciary performs these responsibilities, then you are well on your way to separating yourself from unhappy employees and prying DOL and IRS agents. If they are not, then you need to set up steps to get them to this point. First, identify who your plan’s fiduciary is and make sure they are actually a fiduciary. It may seem like an uncanny question, but so many plan sponsors wrongly assume they have a fiduciary when in fact they don’t. Make sure to read all your existing plan documents and have the so-called fiduciary of your plan put in writing, sign and sealed, that they are a fiduciary.

For additional information, visit my article: 2 Ways Plan Sponsors Can Protect Themselves Against 401(k) Lawsuits.

For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.

Retirement Investments: Charles Massimo’s Top 3 Guidelines for Your 401(k) on the Ursula Reutin Radio Show

Charles Massimo — Wed, 18 May 2011 16:15:00 GMT

Over the last few years, many people have been forced to tap into their retirement savings early after losing their jobs. In the first quarter of this year, one in five 401(k) participants had an outstanding loan. If you had to dip into your nest egg, Massimo says don’t beat yourself up over it. “Now moving forward, start to plan. ‘How do I replenish my 401K? And then as I replenish my 401K how do I also create a bucket for short term financial needs.’ “

Listen to the show to find out how to take charge of your 401(k) and get back on track after dealing with a stock market crash, record unemployment and a recession. It’s not as rosy as it seems, but these 3 approaches will show you that a 401(k) is a great place to start to build your retirement investments.

Click the player below to listen to the show:

Charles Massimo’s on the Ursula Reutin Radio Show [ 2:31 ] Hide Player | Play in Popup | Download

Wealth Preservation: How to Manage Unexpected Inflation Risk

Charles Massimo — Tue, 17 May 2011 16:44:00 GMT

Investors are concerned about how they can prepare for potentially higher inflation. Two ways to address unexpected inflation is hedging the immediate effects of inflation or earning a total return that outpaces inflation over time. Asset prices already reflect the market’s expectations about future inflation, given all available information. Inflation may turn out to be worse than expected, and this risk of unexpected inflation is what some investors may want to manage in an attempt to preserve wealth.

The basic premise for hedging involves choosing assets whose value tends to rise with inflation. Although holding these assets may reduce the total return of a portfolio, the positive correlation with inflation can help an investor keep up with rising consumer prices, at least over the short term. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)

If you’re a retiree, fixed income investor, or someone who would experience a diminished living standard during an inflationary period, you’re a candidate for hedging. These investors are willing to forfeit long-term growth potential for more immediate inflation protection.

An investor who attempts to outpace inflation by holding assets that are expected to earn higher real (inflation-adjusted) returns, is using a total return strategy. This investor is willing to give up short-term inflation protection for an opportunity to grow real wealth. Younger investors are typically well suited for this strategy because they have many years until retirement and expect their earnings to advance faster than the inflation rate. As they save and invest for the future, they can accept more risk through greater exposure to higher-return assets, such as stocks.

You can protect a portfolio from unexpected inflation risk, by using a combination of short-term fixed income, Treasury Inflation-Protected Securities (TIPS) and stocks.

Fixed Income (Bonds)

Higher inflation can hurt bondholders in two ways—through falling bond market values triggered by rising interest rates, and through erosion in the real value of interest payments and principal at maturity. This inflation exposure tends to impact the prices of long-term bonds more than those of short-term bonds, and investors can mitigate the effects of rising interest rates by holding shorter-term instruments. Many types of investors may benefit from holding short-term bonds. When interest rates are climbing, a portfolio with shorter-term maturities enables an investor to more frequently roll over principal at a higher interest rate. This can help inflation-sensitive investors keep up with short-term inflation and enable total return investors to reduce portfolio volatility, which can lead to higher compounded returns and growth of real wealth.

Treasury Inflation-Protected Securities (TIPS)

It is possible to get a guarantee on principal and keep up with inflation. The U.S. government has created bonds with returns indexed to inflation. TIPS are fixed income securities whose principal is adjusted to reflect changes in the Consumer Price Index (CPI). When the CPI rises, the principal increases, which results in higher interest payments. At maturity, an investor receives the greater of the inflation-adjusted or original principal. The inflation provision enables TIPS to preserve real purchasing power and hedge against unexpected inflation. However, keep in mind that TIPS prices also have been affected by changes in real interest rates, so TIPS may not track inflation one-to-one in the short term or over longer periods of time. In fact, TIPS can lose market value if real interest rates increase. Some worry that TIPS have had too low rates, even after considering the inflation adjustment.

Stocks

Equity securities have provided a positive inflation-adjusted return over the long term. Stocks may be less effective for hedging short-term inflation and more suitable for investors who want to beat long-term inflation by earning a higher total return. Some investors assume that high inflation leads to lower stock market performance, while low inflation fuels higher stock returns. In reality, inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.

In closing, while the media have featured conflicting opinions and theories about the effects of recent government actions on inflation, no one really knows how consumer prices will respond to the complex forces at work in the economy and markets. Investors should carefully review their financial circumstances and investment goals before making changes to their portfolio. As you assess your exposure to a high-inflation scenario and form a strategy for wealth preservation that reflects your financial goals and risk tolerance remember to consider that:

Inflation may be one of the most important risks you face
Assets that are highly correlated with inflation are better at hedging immediate inflation risk
Expected inflation is already built into asset prices by market participants
Hedging immediate inflation reduces long-term expected returns
Hedging unexpected inflation has a cost
Volatility matters
Asset class diversification is important for any portfolio

In general, younger investors may be attracted to portfolios with a higher percentage of equities, giving them potential for higher returns and greater protection against long-term inflation (but also greater volatility and uncertainty). Older investors often prefer larger percentages of fixed income securities as their investment time horizon is shorter, risk tolerance is lower, and their need to hedge immediate inflation is greater. Even with the prospect for higher inflation, investors who take a total return approach may be better served than those who choose assets based on correlation with the CPI. By choosing assets with higher expected long-term returns and maintaining broad diversification, investors can seek to grow real wealth and preserve the purchasing power of their dollars.

Wealth Preservation Information: Top 5 Articles to Guide You To A Top Advisor

Charles Massimo — Fri, 13 May 2011 14:48:00 GMT

Most individual investors do not realize the true value a good advisor brings to a client relationship. Oftentimes, in an effort to preserve wealth, these investors end up doing more harm than good by allowing emotions to dictate investment decisions. However, sometimes a client may be better off on their own when they run into an advisor or firm that puts the firm or advisor’s commissions ahead of what’s best for the client. These top 5 articles shed some light on what to look for and what to avoid in a top-notch advisor.

1. The article titled, “Financial Advisor Costs and the Value of Their Investment Strategies Determine Your Return on Investment”, takes a look at the value an advisor adds to a client based on the advisor’s fees and the returns the client actually experiences. Sometimes it’s worth it for a client to seek professional financial advice. However, sometimes the client ends up repeatedly overpaying for poor service and advice.

2. “When to buy or Sell? Don’t Trust Your Instincts”, details the discipline that an advisor can add to a client portfolio that has a behavioral investor calling the shots.

3. “Taking the Time to Pick the Right Financial Advisor” can help you avoid some of the common mistakes investors make when picking a financial advisor.

4. The article, “What a Good Financial Advisor Can Do For You”, provides tips on how to pick a good financial adviser and also offers ways to keep him on his toes.

5. “Handful of Broker-Dealers Holding Back Fiduciary Rule”, acts as more of a guide on what you should look out for. If your advisor or his firm is resistant to new fiduciary rules, that should be a signal to head in the other direction.

Part III: 401(k) Hidden Fees – Top 5 Administration Fees

Charles Massimo — Tue, 10 May 2011 15:42:00 GMT

In the first 2 parts of our 401(k) hidden fees series, we addressed all the fees that can be involved regarding the investment side of a 401(k) plan. However, there are also 401(k) hidden fees that exist regarding the administration of the plan. Not only that, if your plan includes an annuity feature, in addition to these fees you may also be subjected to surrender charges and M&E expenses as well as management fees of the sub accounts. The top 6 administration fees that can eat into a plan participant’s retirement savings are as follows:

9. Recordkeeping Fees-It’s pretty much exactly as it sounds. It’s the cost of keeping account records. The record keeper keeps track of the plan. This can range from the daily valuation of the plan to participant tracking to allowing participants’ access to their account online. This fee can be paid by the plan sponsor or the participant.

10. Custodian Fees-The custodian is the firm that is responsible for holding the assets of the plan. The fee is charged by the brokerage firm or institution for safekeeping services. This provides the investor with a safe place for assets to be held. These costs are paid by the participant and taken right from the retirement account.

11. Third Party Administration Fees-TPAs, as they are most commonly referred to, are responsible for compliance testing, plan design and ensuring the plan is valid under IRS rules. They are responsible for filing the form 5500 for a 401(k) retirement plan. Many employee benefit plans have highly technical aspects and difficult administration that can make using a specialized entity such as a TPA more cost effective than doing the same processing in house. However these fees can become excessive if revenue sharing comes into play. They can also be referred to as contract administration fees. Again, this fee can be paid by the plan sponsor or can be passed on to the participant.

12. Plan document filing/ set up, conversion costs-These costs are incurred annually when the plan files taxes. Also, the costs of setting a plan up or converting from another provider will be included here as well. Depending on the plan sponsor, they may incur the costs or pass the costs on to the plan participant.

13. Trustee service costs-Plans that have a trustee will incur trust service costs. A recent study done by the Trust Advisors Blogsite shows that trust fees are headed higher and even the most basic, no-frills account can be $3000 a year. That’s for a plan with roughly $500,000 and very few participants.

In closing, there can be several 401k hidden fees associated with the administration of a plan. The top 6 are:

Recordkeeping
Custodian
Third party administration
Plan document filing/set-up
Trustee services

TPA and recordkeeping costs can become excessive if they are calculated as a percentage of assets under management. You then end up paying more fees for the same exact services based solely on an increase in account value. A way to monitor any and all fees and keep them low is to ensure they are separate, and fully disclosed and transparent. The most efficient way to accomplish this is by setting up an “ERISA budget account” or a “401(k) expense recapture account”.

Fiduciary Liability: 2 Ways Plan Sponsors Can Protect Themselves Against 401k Lawsuits

Charles Massimo — Fri, 06 May 2011 16:57:00 GMT

With the implementation of New Department of Labor Disclosure Regulations, the fact that so many business owners and plan sponsors are uninformed, and the increasing attentiveness of plan participants to their diminishing retirement balances, it’s no surprise that 401k lawsuits has increased 23% year over year for the past 3 years.

Wal-mart, Caterpillar, Edison International, and more recently Bechtel Corporation and Kraft Foods are just a handful of firms that have been defending themselves against 401k lawsuits brought on by unhappy employees and plan participants dissatisfied with lackluster management of 401k plans. As a plan sponsor, business owner or trustee of a 401k plan, you have 2 primary objectives. The first is providing first-rate benefits to plan participants at a reasonable cost and the second is to take on minimal fiduciary liability for you and other plan sponsors, trustees, committee members, etc. Even if there is no settlement against you and your firm, the average cost of simply having to defend your firm against such a lawsuit as mentioned above can be upwards of $365,000.

In order to avoid such costly litigation, there are 2 ways that a plan sponsor, trustee, business owner, or committee member can protect themselves against 401k lawsuits.

The first is to invest in Fiduciary Liability Insurance.
Plan sponsors can file claims for lawsuits regarding breach of fiduciary duty, failure to fund benefits, failure to act in a timely manner, failures regarding benefits communication or benefits eligibility, ERISA violations and the list goes on. However, purchasing fiduciary liability insurance can be very expensive costing upwards of $5,000 per million of coverage per covered employee. Also, this type of coverage is very difficult to qualify for. The applications can be very detailed and plan sponsors must perform a series of tasks, many of which they normally don’t perform anyway, in order to get coverage. Even if you do receive coverage, if the plan sponsor fails to maintain any of the required procedures, the policy will not pay. That makes fiduciary liability insurance a carrier’s dream because the coverage turns out to be mostly profit since they rarely pay out on the policies.

The second way for a plan sponsor to protect themselves is to outsource their fiduciary liability to an independent firm who is licensed and insured.
Look for a firm that has the ability to handle all DOL subpoenas; any notices regarding the IRS and that can assist in IRS Department of Labor CPA audits. Also look for a firm that will set policies in place so that you can avoid conflicts of interest, prohibited transactions and identify parties of interest.

If you weren’t a mechanic, you wouldn’t try to fix your own car. If you weren’t a doctor, you wouldn’t try to practice medicine. Then why is it that plan sponsors, CFOs, business owners, HR professionals, etc., insist on taking on personal fiduciary liability responsibility when they are not an expert and are not prepared for such a task? Not only that, wouldn’t your time be better spent doing what you may do best which is running your business, handling new hires, or budgeting the income and expenses of your firm based on whether you were an owner, CFO, HR personnel or a committee member?

What’s even more mind boggling, is many of these individuals fail to truly understand or realize the extent of the liability they are taking on, because they continue to be misinformed and misled by their existing service providers. If your service provider is unwilling to detail in writing the type of coverage you have, meaning the type of fiduciary liability they take on, it’s more than likely they are taking on a lot less or worse yet none of the fiduciary liability you may assume you were paying them for. Plan sponsors have a tendency to believe that the record keeper or third party administrator is acting as a 3 (21) fiduciary and that the broker/ advisor is acting as the 3 (38) fiduciary.

More often than not, this couldn’t be further from the truth. Don’t wait until the Department of Labor or IRS comes knocking on your door! Don’t wait until an ex-employee notices the excessive fees coming out of his plan and decides to start a 401k lawsuit! Be proactive and consider the additional funds you could have going into the 401k plan because you reduced costs; bear in mind the content employees you could have if you take the time to explore ways to not only improve your existing plan, but to reduce or virtually eliminate your liability while at the same time reducing costs thereby having a better experience for all involved. lastly, think of the worry free time you will have to put back into your business now that you’ve hired an independent fiduciary to do what they do best.

Wealth Management Expert, Charles Massimo, on the Rusty Humphries Radio Show

Charles Massimo — Fri, 06 May 2011 14:00:00 GMT

“U.S. Economic Growth Slows to 1.8% Rate in Quarter” was the headline in the New York Times last week. ”But economists are hopeful that the setback will be temporary”.

Listen to my interview with Rusty Humphries as I discuss what this means for you and your money. I explain what factors contributed to the slowdown but also identify those economic trends that show promise. More importantly, I outline why this should not impact the way you invest. As a disciplined advisor, I always encourage having a structured plan in place and not allowing politics, the economy, friends, family, trends, etc to affect your investment philosophy. The only time you should alter your investment policy is if you have a life-changing situation, otherwise sticking to your plans is the optimum way to achieve your long-term goals.

Click the player below to listen to the show:

Charles Massimo on Rusty Humphries Radio Show [ 10:38 ] Hide Player | Play in Popup | Download

Retirement Investments: 3 Reasons to Add Stocks to Your Portfolio

Charles Massimo — Wed, 04 May 2011 15:09:00 GMT

There’s no denying that the past several years have been extremely unpredictable for anyone trying to save for their golden years. The mortgage debacle, housing market crash and Wall Street volatility made for very unstable conditions when planning the type of retirement investments to choose. Even the most conservative investor, who is invested mainly in bonds, can benefit from the addition of a small amount of stock exposure. Though the investor is taking on additional risk with equities, the overall volatility of the portfolio can remain the same. With that said, here are 3 reasons why incorporating stocks, even relatively a small amount, into a conservative portfolio of bonds can increase the chance of an investor meeting their long-term goals.

1. Shelter from purchasing power and longevity risk. If an investor is in bonds only, they may hold a collection of mixed maturities and varied quality bonds. When a portfolio contains bonds with longer maturities and lower quality, you still have a portfolio that has uncertainty and volatility since bonds with longer maturities and less quality can react strongly to economic news, interest rate movements or inflation expectations. When an investor enters retirement, the most conservative portfolios may contain almost all cash and bonds. This may protect you from downside risk, but it won’t protect you from purchasing power/ inflationary risks and longevity risk which stems from an increase in life expectancy that can cause insurance companies and pension plans to have higher payouts. Even a very small change in life expectancies can create severe solvency issues for pension plans and insurance companies. Defined benefit pension plans and annuities have the greatest levels of longevity risks. Historically speaking, equities have been a much better hedge against inflation.

2. Increase portfolio returns via diversification. Aside from hedging risks associated with bonds, a mix of stocks and bonds may help overall portfolio returns because of diversification. Incorporating a sensible amount of stocks into a conservative bond portfolio should have a beneficial impact on the overall risk/return of the portfolio. Historically, stocks and bonds have a low correlation, which means one may rise as the other falls. Diversification is always a factor that needs to be considered regarding retirement investments.

3. Dividends and capital gains can provide additional income for a portfolio. Many stocks, especially those of value companies, pay out a dividend. Additional returns derived from stocks can come from capital appreciation over time if share prices rise. Even though capital appreciation over time is likely to be more volatile than say a standard bond coupon, if an investor can harvest capital gains over time, the investor may create a “synthetic dividend” to satisfy income requirements. If you are able to control income through creating synthetic dividends, this can allow for more flexibility and control over your portfolio. For example, in a typical bond portfolio an investor may not need all of the income that a portfolio is producing each year. By integrating stocks into a conservative portfolio, an investor will be able to control when capital gains are harvested, which will also have the added benefit of more control over taxes.

In summary, when it comes to retirement investments, there are 3 major reasons to consider adding stocks to a conservative bond portfolio:

Hedging against inflation and longevity risks
Diversification
Additional income

Even though there are additional risks associated with investing in stocks compared to bonds, there are also various risks involved if an investor has an all bond portfolio. The biggest risk to an all bond portfolio is having to change your lifestyle because the income and growth generated from an all bond portfolio may not be enough to live on or the even bigger risk of out living your bond portfolio. Even if you’re the most conservative investor, there are advantages to adding a relatively small amount of stock exposure to a bond portfolio that can enhance your retirement investments.

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