Posts Tagged ‘savings’

Recently Wal-Mart has been in the news.  No not because of the holiday sales or how sales were on Black Friday.  Wal-Mart employee Jeremy Braden has taken his company to court over excess fees associated with their 401(k) retirement plan.  A lower court ruling was recently overturned on appeal.  The appellate panel, citing a 6^th Circuit opinion that said information is material if there is a substantial likelihood that nondisclosure “would mislead a reasonable employee in the process of making an adequately informed decision regarding benefits to which she might be entitled.”  The information referred to is the disclosure of revenue sharing arrangements and other information related to the 401(k) under the Employee Retirement Income Security Act (ERISA). 

In Braden’s complaint, he estimated that fees cost the plan $60 million over the past six years and will continue costing approximately $20 million per year in excess fees.  Braden complaint says seven of the plan’s ten funds charge 12b-1 fees from which participants derive no benefit. 

We couldn’t agree more.  Not surprisingly Bank of America Merrill Lynch is the trustee for the plan.

The complaint also alleges that despite the very large pool of assets, the ten funds available offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investments. 

Again, we agree with Braden. 

Another point Brandon made was that no changes to the plan investments were made despite the fact that most of them underperformed the market indexes they were designed to track. 

At this point, Braden should be protected under Whistle Blower laws.  Wal-Mart has a history of terminating troubling employees. 

It appears to us that both Wal-Mart and Merrill Lynch do not understand their fiduciary duties.  There is no reason why a plan of this size in not in institutional shares.  We would also question the need for 12b-1 fees.  The amount of estimated fees collected by Merrill Lynch is astonishing.  In previous reports, Wal-Mart required Merrill Lynch not to disclose its fees.  Unfortunately, at this point, ERISA and the Department of Labor still do not require full disclosure. 

Lastly, a simple review of the investment selection on a regular basis would suggest a change in investment line-up.  Apparently, neither Wal-Mart nor Merrill Lynch thought this was necessary.  Mr. Braden has really hit the ball out of the park.  He has nailed this 401(k) retirement plan as being a revenue generator for Merrill Lynch.  Like most bundled plans, the employees are captive to the plan and to poor fiduciaries decisions. 

When we work review 401(k) retirement plans, the fiduciary responsibility comes first.  Apparently, Wal-Mart and Merrill Lynch do not see it that way. 

It is important to recognize with businesses of any size and retirement plans of any size that the plan sponsor act as a fiduciary at all times when making decisions on their retirement plan.  Regular review of the plans investment selection, fees, performance and service are vital to the responsibility held by the fiduciary.

Well today it was announced that Social Security will not provide any increases for the next two years.  This coupled with increases in Medicare means that seniors will have to dig deeper for savings to met their bills while for others, they will look for ways to decrease monthly bills.  We always have promoted saving while your younger.  Our retirement plans such as 401(k) and 403(b) that we provide have the best investments and lowest costs.  In that regards, we were contacted by the Star Ledger to comment on the needs of those on Social Security and how to address the frozen increases. 

The link to the Star Ledger page is:

http://www.nj.com/business/index.ssf/2009/08/surviving_shrinking_social_sec.html

This article by Leslie Kwoh provides suggestions on cutting back your bills.

Dennis O’Brien discusses the risk of investing in target-date funds in a story examining the hearings being conducted by the Securities and Exchange Commission and the Department of Labor on these investment vehicles.

 What’s Up With Target-Date Funds?

By PAUL KATZEFF, INVESTOR’S BUSINESS DAILY

Posted 06/23/2009 05:10 PM ET

 The latest financial scapegoat? Target-date funds. At a joint hearing by the Securities and Exchange Commission and Department of Labor last week, critics beat up on the increasingly popular mutual funds.

 The catalyst was that most target-date funds — like much of the fund industry — lost ground last year.  The problem was that some people were shocked by that.

 “Some people think these funds are risk-free,” said Dennis O’Brien, president of Coastal Financial Advisers, of Farmingdale, N.J. “They don’t understand that these are investments. They can lose ground, especially during short periods.”

 In the worst-case scenario, the SEC and DOL could restrict how target-date funds invest. The DOL will take public comments until July 18. After that it will indicate what action, if any, it plans.

 “There is no denying that 2008 was the second-worst market ever for equities,” Francis Kinniry, a principal in Vanguard’s Investment Strategy Group, told IBD before the hearings. “Everyone should take a deep break and use a much longer lens than one year. The market has rebounded (about 34% off its March 6 intraday) low. That should influence the eventual outcome here.”

 A bigger problem for target-date funds is how fund families market them, said O’Brien, who is a financial adviser to individual clients and consultant who helps corporate clients set up and run 401(k) plans.

 “Not enough fund groups clearly explain how these funds are run and how they differ from each other,” O’Brien said. “Not enough of them explain their risks or their costs.”

 The stakes are rising. Target-date funds have grown a lot. As of May 31 they held $181.8 billion in assets. That was 3.06% of all fund assets and up from $152.8 billion on Dec. 31. It was also well up from $7.2 billion at the end of 1999, or 0.16% percent of all fund assets.

 The funds have become a staple of 401(k) plans, especially since 2007. Late that year the DOL gave incentives to plans that use them as default investment options for workers who are automatically enrolled.

 Proliferating Portfolios

Target date funds are in more than 33% of all 401(k) plans, says the Profit Sharing/401(k) Council of America. That’s up from 25% in 2005.  The funds generally invest in other mutual funds. A parent fund’s ratio of bonds and cash to stock typically grows as the target date nears.  That’s meant to better preserve the fund’s principal. The target date is usually near a shareholder’s intended retirement. Target-date funds overall averaged a 32.96% loss in 2008, according to Morningstar. The S&P 500 lost 37%. U.S. diversified stock funds averaged a nearly 39% loss.

 As might be expected, target-date funds with the longest investment horizons generally did worse. Last year funds with a target date of 2050 or later averaged a 39% loss. The $10 million JPMorgan SmartRetirement 2050 fell 33.53%, marking the best of the long-range funds.

 Funds with target dates from 2000 through 2010 fared best, averaging a setback of 22.46%.

 Among funds with the shortest views, $32 million DWS Target 2010 took top performance honors with a 3.61% loss. The $20 million Oppenheimer Transition 2010 was the cellar dweller with a 41.84% plunge.

 Too many shareholders do not understand how target-date funds differ, O’Brien says. First, there are two broad varieties.

 In addition to the type known as target-date funds, there are lifecycle funds. These portfolios do not shift their asset mix over time.  Instead, as he ages a shareholder is supposed to hop from one with an aggressive investment strategy — usually with more stocks — to one with a moderate strategy. As he nears retirement, he shifts to one with a conservative tack, with more bonds and cash.

 Different Approach

Second, many shareholders do not realize that funds with the same target date or in the same lifecycle category often invest differently.

 They can have different ratios of stocks, bonds and cash. Drilling down, they can also have different types of stocks and bonds.

 “A fund with all blue chips tends to perform differently from one with a mix of large caps, small caps and emerging markets,” O’Brien said.

 Also, only some funds stop making strategic moves when they reach their target date. Some shareholders cash out. Others want ongoing growth or income.

 “Some fund families do a better job than others of explaining things,” O’Brien said. “Shareholders can look up information at fund Web sites. They can also check through their 401(k) plans.”

 © 2009 Investor’s Business Daily, Inc. All rights reserved. Investor’s Business Daily, IBD and CAN SLIM and their corresponding logos are registered trademarks of Data Analysis Inc.

The economy has affected our savings, retirement plans and home values.  The values of our college savings for our children have diminished.  Now what can we do to make the best of the remaining time to save before entering college?

Participation and ownership is needed from the child.  We suggest a three-pronged college funding approach to paying for college.  The parent chips in a third through savings, earnings and appreciated stock.  The child chips in a third through scholarships, grants and their savings.  The final third is taken out through loans in the child’s name first, then the parents.  The parents and/or grand parents can then come back at graduation time and give a gift of paying down some of the loans.   

There are several ways to save for college.  529 plans are the most common but have taken a beating just like other investments in recent months.  With college costs still going up, is it worth the investment?  We say yes it is.  The ability to save taxes on the growth of the investment will be worth it.  While there are several ways to save for education, the 529 plan is still the best method to save for college.

Let’s look at some new changes for the 529 plans.  The IRS has a special rule for 2009 that permits two investment changes for this year only.  Normally only one investment change per year is permitted.  Investments have not performed as profitably as we all have hoped.  Here is an opportunity to modify your investment selection based on the current value of your account and your anticipated additions. 

If you have not been happy with your 529 plan consider a rollover to another plan.  You can roll over one account to another without a tax hit as long as it stays custodian to custodian.  You can change to any state plan, but you should consider any benefits offered from your home state first.  Several states such as New York provides that   contributions to any of New York’s 529 plans of up to $5,000 per year for an individual taxpayer, and $10,000 per year for married taxpayers filing jointly, are deductible in computing New York taxable income.  You should weigh your home state benefits with the costs and investment options.  So for example while New York offers an income deduction, the fees associated with an advisor sold plan range from 0.52% to 2.73% depending on the share class used.  Consider weighing the age of the child along with the state benefit versus the cost and potential gain in the plan.  Sometimes it is worth going outside of your home state for a better plan. 

Some plans charge sales charges or back-end loads of as much as 5.75%.  We find this excessive.  High costs really eat into your investment gains.  With the account values down, the higher cost investments are magnified and take more of the remaining value.  Consider a plan with lower costs.  In most cases low-cost plans have better investment options, which may perform better in the long run.  States that have low-cost direct sold plans include Alaska, Maryland, Nevada and West Virginia.  These plans have costs that run less than 1.00%

For accounts where you know you will not be able to make up the difference and you anticipate the account value will remain at a loss, you may instead want to consider liquidating your “underwater” 529 account and claiming the loss as a miscellaneous itemized deduction on your 2009 taxes.  What do you do then?  If your child is in high school, it may be best to save in a regular taxable savings account.  If your child is younger, you may want to start a new plan by review the various options as previously mentioned. 

Education savings should be reviewed just as all other assets on a regular basis.  Changes should be made where one can find improvements.  There are many 529 plans to choose from and careful review is necessary.