Secrets to a Successful 401(k) Plan

The Wall Street bullies will promote actively traded funds whenever possible. Not because it will help you earn a better return but because they will earn trading fees. Since the 401(k) plan has become the sole source of retirement for most Americans it should be offered more like a pension fund. Each employees will be automatically enrolled in an age appropriate portfolio. From there the employee can change their risk level. Studies have proven that less choice will result in better performance.

Fiduciary Trust Building
Fiduciary Trust Building (Photo credit: ToastyKen)

The fiduciary duty of prudence requires plans and plan fiduciaries to always out the interests of the plan participants and their beneficiaries first. The duty of prudence consists of various responsibilities, including the duty to avoid unnecessary expenses and the duty to provide participants with a selection of investment options that allows them to minimize the risk of significant losses and “sufficient information to allow plan participants to make an informed decision.”I recently released a white paper on the Active Management Value Ratio,  proprietary metric that allows investors and fiduciaries to analyze the cost efficiency of actively managed funds.  The white paper clearly shows that a number of the leading mutual funds used by pension plans are not cost efficient, in some cases even reducing a plan participant’s return. It could be argued that such inefficiency could constitute a breach of fiduciary duty, clearly not a sign of a successful plan.

Plans and their fiduciaries are required to provide plan participants with a sufficient selection of investment options to reduce the risk of large losses and sufficient information to evaluate such investment options and make informed investment decisions. In short, in most cases this simply is not happening.

In  most cases plans are primarily an assortment of expensive, highly correlated equity-based mutual funds that unnecessarily expose plans and plan fiduciaries to unlimited personal liability. Furthermore, in many cases plans fail to provide plan participants with all of the information they need to make informed decisions, resulting in liability exposure for both the plan and its fiduciaries.

Many plans and plan fiduciaries mistakenly believe that they do not face any personal liability by virtue of their mistaken belief that they have complied with ERISA Section 404(c). However, Fred Reish, one of the nation’s leading ERISA attorneys, has testified that over his twenty plus years of ERISA practice, he has never seen a plan properly comply with all of Section 404(c)’s requirements. Consequently, there are a lot of plans and plan fiduciaries that do not realize the risk exposure that they actually have.

The Wall Street bullies have convinced everyone that they know what’s best for your 401(k) plan and your employees. These bullies do not have your best interest in mind.

Please comment or call to discuss how this affects you and your company.

Posted via email from Curated 401k Plan Content

  • Cramer Sees the Light (But Misses the Point)
  • Managed Portfolios and Your 401(k)
  • Is There a “Mini-Me” ERISA Section 3(38) Investment Manager?
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Roth conversions easier, but are they right?

When you are deciding whether to convert your IRA/401(k) to a Roth seek the advice of an objective financial professional. With the increasing tax environment we need to assess the value of a conversion now. It may be right for some and not for others.

Scrabble Series Roth IRA Ver2
Scrabble Series Roth IRA Ver2 (Photo credit:

So when might a Roth conversion make sense?Appleby said the following are some of the cases in which Roth conversions may make sense:

  • The IRA owner wants to leave a tax-free inheritance to his beneficiaries, and does not care how much it costs him to pay the taxes now, even if it would cost more if he pays the taxes instead of his beneficiaries paying the taxes.
  • The results of comprehensive Roth conversion analysis shows that a Roth conversion will very likely make good tax/financial sense.
  • The IRA owner is at the lower end of the tax-rate scale now, and will very likely be in a much higher tax-rate scale as his income increases including during retirement.
  • The IRA owner has enough deductions and tax credits to offset the tax bill that would be due on the Roth conversion.

There is no cookie cutter solution to the question, should I c3onvert my IRA/401(k) to a Roth? Each individual has unique circumstances and should the objective advice of an independent fiduciary.

Please comment or call to discuss how this affects you and your family.

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Roth 401(K) Conversions For All Thanks To Fiscal Cliff Deal

Plan sponsors need to review their 401(k) plan to determine that the plan is appropriate. There is also an imperative need to educate their employees on any tax changes. Plan sponsors fiduciary responsibilities and risks will be taking center stage for some time.

Scrabble Series Roth IRA Ver1
Scrabble Series Roth IRA Ver1 (Photo credit:

The new rules become effective Jan. 1, 2013, but you can transfer amounts contributed to pre-tax accounts in 2012 and earlier. So say you had made pre-tax 401(k) contributions over the years before your employer started offering the Roth 401(k) option. You could convert the pre-tax contributions and any earnings and any employer match, so that your whole account is Rothified. Going forward you could then make contributions earmarked directly to the Roth 401(k) account.The strategy is much like converting a traditional pre-tax IRA to a Roth IRA, a move savvy taxpayers make who think it’s worth paying taxes now—at historically low rates—rather than later. You pay income tax on the amount you convert. The Roth grows tax free and eventual distributions are tax free. A Roth conversion makes sense if you expect your tax rate to be the same or higher in retirement and won’t need the funds for a decade or more. It’s also an attractive way to leave an income-tax-free inheritance to your kids or grandkids.

“It’s a huge opportunity for younger workers who have the cash on hand to pay the conversion tax,” says Urwitz. For employees who have larger pretax balances, they can convert part of the 401(k) at a time. The longer the money has to grow, the more likely it is that the conversion will be worthwhile.

Plan participants should check with their employer to determine whether the Roth option is available. The next step would be to seek the advice of a financial professional. Preferably an independent fiduciary. If your employer provides such advice take advantage of it, if not seek outside guidance.

Please comment or call to discuss how this affects you and your financial future.

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Watch Out: Your 401(k) Is Being Targeted

The drama created by the federal government has led many Americans to believed that the federal government cannot be trusted with their financial future. This includes your retirement accounts. We should become more accountable for our own future. This does not include using our retirement accounts like a casino. We should develop a prudent strategy and remain disciplined to that strategy. In most cases this requires the guidance of an investor coach.

USAftertaxIncomeByIncomeLevel (Photo credit: Wikipedia)

A Petition to Protect the 401(k)

All of these rumblings have led the American Society of Pension Professionals and Actuaries to launch the “Save My 401(k)” online petition, which it also calls “Protect My Piggy.” (I’m no Beltway pundit, but I don’t think using the word “piggy” will be endearing to deficit hawks in D.C.) The website for the grassroots campaign lets you email your concern to your members of Congress.

“We understand Congress needs to reduce the debt and raise revenue, but raiding the tax incentives for 401(k) plans will put American workers’ retirement security at risk,” says Brian Graff, the society’s executive director and chief executive.

2 Tips for Retirement Savers

With retirement plans a likely target, I have two pieces of advice:

1. Invest as much as you can next year in your 401(k) or similar employer-sponsored plan if you have one. If you can invest in an IRA, do it; the contribution limit for traditional and Roth IRAs in 2013 will be $5,500; $6,500 if you are 50 or older.

2. If you work for an employer with a 401(k) plan that offers advice, pay attention to it.Writing in the Schwab Talk Blog, Catherine Golladay says that a study of employees in plans served by Charles Schwab found that those who follow its 401(k) investment advice save more, are better diversified and are better equipped to handle inevitable fluctuations in the market. Planning for your eventual retirement is tough, so I say: Why not benefit from smart insights from professionals, when they’re there for the taking?

One proposal is to limit 401(k) deductions, including employer contributions is $20,000 or 20% of gross pay whichever is less. Employees should put away as much as possible in 2013.

Please comment or call to discuss other alternatives.

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4 reasons not to roll over an old 401(k)

Any move you make should be with the advice of a financial professional. Objective advice is very difficult to find today, therefore you should seek an independent fiduciary adviser. This will lead to solutions that are in your best interest and not the best interest of the broker.

Roth IRA
Roth IRA (Photo credit: Philip Taylor PT)

1. You plan to retire between ages 55 and 59.5

As you’ve probably read before, taking money out of a traditional IRA prior to age 59-and-a-half results in a 10% penalty, unless you meet one of several exceptions.

What many investors don’t know is that with a 401(k), the 10% penalty on distributions does not apply if you are at least age 55 (rather than 59.5) at the end of the calendar year in which you left your employer.

So, if you’re planning to retire prior to age 59.5, keeping money in your old 401(k) is an easy way to get penalty-free access to some cash for the years between ages 55 and 59.5. Then, after you reach age 59.5, you can roll what’s left of the 401(k) into an IRA if it makes sense to do so.

2. You’re planning a Roth conversion

If you have a traditional IRA that includes nondeductible contributions and you are planning to do a Roth conversion in the near future (a “back-door Roth,” for example), holding off on a 401(k) rollover is likely to be beneficial.

When you do a Roth IRA conversion, the percentage of the conversion that is not taxable is calculated as your net nondeductible contributions, divided by the sum of:

— All of your traditional IRA balances (and SEP and SIMPLE IRA balances) as of the end of the year of conversion,

— Any Roth IRA conversions you made throughout the year, and

— Any other distributions you took from your IRA throughout the year.

Rolling a pre-tax 401(k) into an IRA increases the first item on that list, thereby reducing the portion of a conversion that would be nontaxable. In other words, rolling over a pretax 401(k) into an IRA in the same year that you do a Roth conversion will increase the portion of the conversion that is taxable as income.

3. Your old 401(k) has better investment options

In some cases — particularly if your previous employer was a large organization — you may actually have better investment options in your old retirement plan than you would in an IRA.

For example, if your ex-employer’s retirement plan includes the “Institutional” share class of Vanguard mutual funds, the expense ratios on those funds are typically about 1/3 lower than the cost of the ETF or “Admiral” share classes that you would have access to in an IRA.

Or, if you worked for the federal government and had access to its Thrift Savings Plan (TSP), no fund available to retail investors is going to be less expensive than the 0.025% expense ratio you’re paying on the TSP funds.

4. You have employer stock in your 401(k)

If you have appreciated employer stock in your old 401(k), you might want to roll that stock into a taxable brokerage account rather than into an IRA in order to take advantage of the “net unrealized appreciation” rules.

Here’s why: If you roll the stock into an IRA, all of it will be taxable as ordinary income when you eventually withdraw from the IRA.

But if you roll the stock into a taxable account, only your cost basis (the amount you paid for the shares) will count as a taxable distribution. Any net unrealized appreciation (the amount by which the stock has increased in value while in your 401(k) account) will be taxed as a long-term capital gain rather than ordinary income.

It’s important to understand, however, that if you’re under age 55 when you roll the employer stock into a taxable account, the 10% penalty will apply to your basis in the stock, because it will count as an early distribution.

If you’re considering taking advantage of this particular tax break, I would suggest consulting with a tax professional to make sure you follow the necessary rules.

Whenever you are deciding what to do with your 401(k) at an old employer seek the advice of a independent fiduciary. Many brokers will recommend rollover, not because it is in your best interest. Brokers will recommend a rollover to earn a commission.

Please comment or call to discuss how this affects you and your financial future.

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Your 401(k): Why You Can’t Go It Alone

Most investors believe that the Wall Street bullies can predict the future. The Wall Street bullies know investors make their investment decisions based on emotions and not logic. Investors need to control their emotions to succeed long term in reaching their financial goals. This can not be done on your own. You need to fire your broker and hire an investor coach.

English: Wall Street sign on Wall Street
English: Wall Street sign on Wall Street (Photo credit: Wikipedia)

Most people in these plans have no idea how to manage them. That’s why your employer should help you. After all, there’s no point in providing employees with this benefit if you don’t help them get the most out of it. It’s like giving your son or daughter a car and never ensuring that they know how to drive safely. Most 401(k) accounts crash before reaching their destination. 

The Pension Protection Act of 2006 allows plan sponsors to automatically enroll their employees in age appropriate managed portfolios. This single feature will improve performance results and reduce fiduciary risks. Making the 401(k) plan more like a pension plan will be very attractive to current and prospective employees.

Please comment or call to discuss how this affects you and your company.

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Managed Portfolios and Your 401(k)

For the 401(k) plan to succeed as the sole source of retirement for most Americans it must become more pension fund like. People are ill prepared to manage their own portfolios. They tend to make emotional decsions, based on what they hear and see in the media. To succeed in managing a retirement portfolio requires a prudent strategy and discipline. A successful poretfolio will own equities, globally diversify and rebalance.

Retirement (Photo credit: Wikipedia)

A good managed portfolio 401(k) plan must:

  • Have well-managed underlying investments. It requires good mutual funds that have performed well through market ups and downs relative to their peers in the same asset class, and a fund manager has been with the fund through these ups and downs and has managed the fund in accordance with the parameters of its prospectus.
  • Only offer portfolios that are diversified across several asset classes. Retirement investors need to protect their nest eggs with investments that span multiple asset classes so that, when one class experiences volatility, the retirement portfolio can glean stability from the other asset classes.
  • Offer several portfolios in order to provide appropriate options for all employees.
  • Help employees to select the appropriate managed portfolio based on the individual investor’s risk tolerance, timeline to retirement, retirement goals and personal preferences. This shouldn’t be a guessing situation. Your employer or the financial services company providing the portfolios should provide a questionnaire that helps you pinpoint the appropriate portfolio for your current needs.
  • Not add significant expenses because another layer of management is being used. You can expect to pay for an additional service like managed portfolios or advice, but costs should be reasonable.

Managed portfolios are not strictly a set-it-and-forget it option. There’s no such thing, and you should be leery of anyone who tells you otherwise. Investors’ goals and timelines change. Your tolerance for risk could even change. It stands to reason that investors in a 401(k) plan with managed portfolios could need to move through several portfolios over the course of a working career.

Your work doesn’t end there. Now and always, regardless of industry developments, employees should periodically check in on their 401(k) plan ratings—try Keep tabs to ensure your employer is providing a good plan. If managed portfolios are a trend that continues to grow, some lower quality options could pop up. Employers need to be vigilant in ensuring they offer managed portfolios that are well managed and appropriate. Due diligence will continue to be important so employers fulfill fiduciary duties.

This one change will allow more of your employees successfully retire. The 401(k) plan was designed as a supplement to a pension plan, it has become the sole source of retirement for most Americans. Plan sponsors should treat their plan more like a pension plan.

Please comment or call to discuss how this affects you and your company.

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Brokers Eat Their Own

For the 401(k) plan to succeed it must look more like a pension plan and less like a casino. Plan sponsors need to provide the proper fiduciary oversight to offer a retirement plan which will lead to successful retirements. This oversight should include service providers willing to serve as ERISA 3(38) Investment Managers in writing. If improvements are not made soon the 401(k) plan could become the next “Obamacare”.

Outdoor Security Barriers - Ameriprise Financi...
Outdoor Security Barriers – Ameriprise Financial Center (Photo credit: Zach K)

Ameriprise is a large holding company that provides a broad range of financial planning services. The lawsuit seeks class action status and was filed by three current and four former participants in the Ameriprise 401(k) plan. One of the primary allegations involves the selection of funds managed by a subsidiary of Ameriprise. The complaint states that the plan was the first investor in these funds, which had no performance history. Plan assets of approximately $500 million a year were invested in these funds, commencing in 1995. Plaintiffs allege the funds performed poorly, underperforming their benchmarks, and accused Ameriprise of generating excessive fees from these investments. Ameriprise moved to dismiss the complaint.The District Court denied the motion to dismiss the claim relating to these funds, stating: “Plaintiffs in this case plausibly allege that Defendants selected Ameriprise affiliated funds, such as RiverSource mutual funds and non-mutual funds managed by ATC, to benefit themselves at the expense of participants.” Counsel for the class representatives, Jerome Schlichter, of the St. Louis law firm of Schlichter, Bogard and Denton, stated: “Ameriprise certainly should know that their in house funds were poor choices for retirement assets.”

This decision gives plaintiffs the opportunity to proceed with their case. It is not a finding of wrongdoing by Ameriprise. Nevertheless, it is illustrative of the cavalier attitude of plan sponsors. They are supposed to act as fiduciaries to plan participants by selecting investment options that are in the best interest of the participants. In my opinion, any plan that does not offer globally diversified portfolios of low management fee index funds should be deemed to violate this duty. Until the Courts adopt that position, lawyers will go after the low hanging fruit, and attack only the most egregious violations. The Ameriprise case fits well into this category. It’s worse because it involves a large player in the advisory business placing its own interests above those of its employees.

The industry is so rife with greed that it eats its own.

This is another reason the 401(k) plans provided by brokerage firms and insurance companies do not benefit the plan participants and their beneficiaries. We need a more pension fund like plan with providers willing to serve as ERISA 3(38) Investments Managers in writing.

Please comment or call to discuss how this affects you and your retirement.

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Best Buy’s 401(k) Meltdown

No matter how loyal you are to you employer and no matter how well your company stock has performed in the past do not put all your ‘eggs’ in one basket. No one can predict the future and the unexpected can happen at anytime. If something happens to your employer and most or all your retirement account is in the company stock, you would not only lose your job bit also your retirement account. Don’t do it.

1903 stock certificate of the Baltimore and Oh...
1903 stock certificate of the Baltimore and Ohio Railroad (Photo credit: Wikipedia)

As hard as times are for investors in Best Buy’s shares, far grimmer is the plight of the 110,000 employees participating in the company’s approximately $1 billion 401(k) plan.  Not only do they have to worry about possibly losing their jobs if the company can’t right itself, their so-called retirement plan is heavily invested (17%) in company stock. Assuming the company stock in the plan has lost half its value this year, employee retirement assets have likely taken a near 9% hit. Average account balances of around $9,000 have plummeted to around $8,000, it seems. With nest eggs this puny, they’ll be lucky to spend their golden years eating at the Golden Arches.To add insult to injury, Best Buy’s 401(k) participants have been paying over a million a year to financial advisors involved in the design and administration of an optimal retirement plan for them—firms such as Aon Hewitt and JP Morgan. Clearly, it was foreseeable to these professionals, as well as the company sponsor, that a heavy concentration of plan assets invested in company stock could be disastrous. Nevertheless, the decision was made to offer company stock as an investment option in the define contribution plan and the percentage allocated to it, not surprising, mushroomed to imprudent levels.

Many companies allow their employees to pay for the administration of their 401(k) plan. When fee disclosure becomes more publicly known, employees will begin asking questions. One question might be “if you the employer does not pay any of the expenses is this really an employee benefit?’

Please comment or call to discuss how this affect you and your company.

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Ameriprise workers’ 401(k) fight goes ahead

Ameriprise Financial
Ameriprise Financial (Photo credit: ehavir)

No one can be sure how this case will be resolved. What I do know is that plan sponsors have a fiduciary duty to provide a retirement plan for the sole benefit of their employees. The new disclosure rules will make it very difficult to provide a plan at no cost to the employer.

A federal judge has refused to dismiss a lawsuit in which employees of Ameriprise Financial Inc. accuse it of loading up the company 401(k) plan with its own expensive, underperforming mutual funds and charging employees excessive fees.U.S. District Judge Susan Richard Nelson in St. Paul noted that the plaintiffs “plausibly allege that the defendants selected Ameriprise-affiliated funds to benefit themselves at the expense of plan participants.” In her order filed Tuesday, the judge let stand seven counts, ranging from failure to monitor fiduciaries, to prohibited transactions and excessive record-keeping fees. One count of unjust enrichment was dismissed.

“Of any company, Ameriprise should know what is a good financial product,” said plaintiffs’ lawyer Jerome Schlicter. “This is a case of frank self-dealing.”

The plaintiffs — seven current and former Ameriprise employees in the Twin Cities — are seeking class-action status, and the outcome of the case could potentially affect more than 14,000 participants in the company’s $1 billion 401(k) plan. A judgment against Minneapolis-based Ameriprise would be a black eye for the country’s largest employer of certified financial planners.

Plan sponsors need to verify that their 401(k) plan is for the sole benefit of the plan participants and their beneficiaries.

Please comment or call to discuss how this affects you and your company.

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