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Going Broke Safely…

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The weaker than expected economic indicators here in the U.S and around the globe has investors seeking safety.

  • Many will seek the safety of cash or CDs.
  • Many will turn to insurance annuities.
  • Some will turn to gold or the next ‘hot commodity’.

This is a great example of people making an emotional decision during short term volatility.

The seal of the United States Department of Labor
The seal of the United States Department of Labor (Photo credit: Wikipedia)

The historic “Risk Free Rate” is about 4%.  The risk free rate is the historic return on government guaranteed T-bills.  Think of them as the CDs issued by Uncle Sam.  They have a very low return but virtually no volatility.  They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long term losses.  It’s the safest way to go broke.

There has been abundance of ads for annuities touting the ‘guaranteed’ return of as much as 6.5%. What they don’t tell you is that in order to receive the ‘guaranteed’ rate you need to annuitize after a 5 to 10 year holding period.

This means you give complete control of YOUR money to the insurance company in exchange for a monthly income for life. They also neglect to tell you that once annuitized the ‘guarantee’ is turned off.

You could run out of money. Because of inflation the purchasing power of your money decreases every day.

These products pay the broker/agent a 8 to 10% commission.  When you consider all the fees you pay, you will not keep up with the inflation. The insurance company and the broker wins and you lose.

The truth about these guaranteed products is becoming evident with the new fiduciary standard.

The Department of Labor will be introducing and implementing a new fiduciary standard for anyone working with consumer’s retirement accounts. As a reminder the fiduciary standard states that the adviser/broker/agent must make recommendations that are in the best interest of the client only.

The financial services industry has been fighting this standard for years. Because now they must prove their solution is in the best interest of the client. In the past it only needed to be suitable. This makes the brokerage firms, insurance companies and banks accountable for all they sell.

You need to ask why haven’t they been recommending what was in my best interest all along ?

With the new fiduciary standard the variable annuity may become obsolete as a solution for an IRA rollover. Any annuity sale could put the salesperson as well as their employer as risk.

Most annuity sales are made by using the fear of market volatility.

We need to ask when did Americans become so afraid of risk ?

We must ignore the short term volatility and be adults about our finances. We should realize there is no free lunch. Risk is risk, live with it.

We might look at downturns as an opportunity to rebalance our portfolio. Buy low and sell high, automatically.

Remember, free markets work, capitalism while not perfect, works.

To succeed, we must own equities….globally diversify….rebalance.

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No Pain No Gain!!!

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The market turmoil over the Europe crisis and the weaker than expected economic indicators here in the U.S. has investors seeking safety.

  • Many will seek the safety of cash or CDs.
  • Many will turn to insurance annuities.
  • Some will turn to gold or the next ‘hot commodity’.

This is a great example of people making an emotional decision during short term volatility.

The historic “Risk Free Rate” is about 4%.  The risk free rate is the historic return on government guaranteed T-bills.  Think of them as the CDs issued by Uncle Sam.  They have a very low return but virtually no volatility.  They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long term losses.  It’s the safest way to go broke.

There has been abundance of ads for annuities touting the ‘guaranteed’ return of as much as 5.0%. What they don’t tell you is that in order to receive the ‘guaranteed’ rate you need to annuitize after a 5 to 10 year holding period.

This means you give complete control of YOUR money to the insurance company in exchange for a monthly income for life.

They also neglect to tell you that once annuitized the ‘guarantee’ is turned off. You could run out of money. Finally, these products pay the broker a 8 to 10% commission.

When you consider all the fees you pay, you will not keep up with the inflation. The insurance company and the broker wins and you lose.

We must ignore the short term volatility and be adults about our finances. We should realize there is no free lunch. Risk is risk, live with it. We might look at this as an opportunity to rebalance our portfolio. Buy low and sell high.

Remember, free markets work, capitalism while not perfect works.

To succeed, we must own equities….globally diversify….rebalance.

Consider working with an investor coach/fiduciary adviser to help you build your prudent portfolio. Once built your coach will help you deal with the volatility along the way.

Do you remember the phrase ‘no pain…no gain’? It refers to the pain you experience after doing exercise or working at a hard physical task.

But in this case if you want the great returns equities provide over the long term. We need to deal with the pain of short term volatility. More specifically ‘bad’ volatility. The kind experienced during downturns. There is also ‘good’ volatility experienced during the inevitable up markets.

Since 1946 the average recovery of a down market of 10% or more is 111 days. I couldn’t resist using ‘some’ statistics.

If you haven’t noticed there is a common theme of these writings. In that, no one can consistently predict the future.

So listen to your coach and ignore the short term volatility. Even during a prolonged ‘bear’ market you need to remain calm and disciplined.

Your journey to financial success is a marathon not a sprint.

What Is Safety in Investments?

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Safety continues to be the word of the day. Investors continue to say what if? What if the stock market goes down? How will I live? What will I do?

Lehman Brothers Rockefeller centre
Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

This is not the first time I have discussed this and it will not be the last. We are emotional beings and are affected by what we hear in the media both financial and political. Therefore this will be a hot topic for some time to come.

Can you really find safety in investments? Remember even insurance companies cannot say guaranteed but rather backed by the insurance company. What does this mean? It means if the insurance company goes out of business you lose. Since 2008 there has been at least twenty life insurance companies that have gone out of business.

What would happen if the stock market went down and stayed down? No one can tell you for certain.

  • Would more insurance companies go bankrupt?
  • Would more banks go bankrupt?
  • Would the entire financial system collapse?
  • What would happen to the value of real estate?

There are predictions that these things can happen. In nearly all  cases these predictions are a marketing gimmick to sell books or the latest hot investment.

It wasn’t that long ago that if I had told you that GM or Lehman Brothers or Bear Sterns or Worldcom or ……..would go bankrupt you would have told me that it was impossible. All these things happened and yet the free markets continue to work.

In my opinion over the long term equities are the greatest wealth creating tool on the planet. It doesn’t matter if our currency is based on gold or platinum or silver or shark teeth people will need goods and services. These goods and services are provided by companies.

Because the equity markets are random and unpredictable.

It is unlikely if not impossible that anyone can tell you which specific investments will outperform with any consistency.

Again as I have said in the past your real risk going forward is inflation or loss of purchasing power. For a retiree this is a real concern. The Wall Street bullies may promise you an insurance policy which will be adjusted for inflation. What they neglect to tell you is that the inflation adjustment excludes food and fuel and soon health care. Now what are a retirees top expenditures in most cases? The answer I’m guessing here is food, fuel and health care.

The 2008 crisis has made many baby boomers make the switch from 100% equities to 100% fixed income. This is a typical reaction or should I say over reaction.

The answer, in my opinion, is somewhere in between. With the help of an investor coach you can determine the right mix of asset classes for you. Remember investing is not a game as the Wall Street bullies would hope you believe.

There are even insurance strategies which will avoid taxes. This sounds appealing to many investors unless you look at the details. If you consider the additional fees these strategies include your total returns will be lower and over time much lower.

The question you need to ask is do you want to pay the insurance company or the IRS? This assumes that the tax code does not change for insurance proceeds.  If the government decides to change how insurance proceeds are taxed you could lose twice.

Given this knowledge there are three simple rules of investing:

  • Own equities and fixed income.
  • Globally diversify.
  • Rebalance.

Your investor coach can help build the right portfolio for you and help keep you disciplined to your plan.

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Annuities: Don’t Believe The Hype

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The Wall Street bullies want you to believe that they have your best interest in mind. Remember if what the insurance companies are protecting you from actually happens, they will be unable to honor their promises. You cannot avoid all risks with your investments you just take different kinds of risk. These risks are all real. Some worse than others.

English: 60 Wall Street
English: 60 Wall Street (Photo credit: Wikipedia)

Have you bought a variable annuity yet? If you’re a baby boomer and your answer is no, get ready for the hard sell. The promoters of these savings vehicles will prey on your insecurity about not having enough money for retirement to get you to sign up for what could be a costly investment. Even if you already have a variable annuity, someone may try to convince you to trade in your existing contract for one with new bells and whistles — in which are buried higher fees. The problem with variable annuities is they are often a high-cost answer to a problem that may have simpler, cheaper solutions, such as fully funding your tax-deferred retirement accounts or assembling a portfolio of reliable dividend-paying stocks. Still, through Sept. 30, 2004, variable annuity sales were $98.4 billion, about 4% higher than during the same period in 2003. And it’s insurance salespeople, not Wall Street brokers, who are making most of the sales. Financial planners in particular have been cool to the product. Variable annuities “are tax-inefficient, difficult if not impossible to understand, and have high costs,” says Warren McIntyre, a financial planner in Troy, Mich. 

via businessweek.com

The sales pitch of both fixed and variable annuities rely on the consumers fears. These agents point to the volatility of the stock market and offer a product which deals with this fear. The cost for this insurance is excessive and unnecessary. It jeopardizes your financial future.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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Why Is Hartford Buying Back $5 Billion of Annuity Contracts They Worked So Hard to Sell?

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Hartford
Hartford (Photo credit: cynikre)

Most fixed annuity buyers do not realize that the guaranteed rate in their anuity can be reduced at any time without notice. It is also in most cases retroactive.

“The insurance companies invested typically in bonds,” explains Edwin Lichtig of California consulting firm Pension Income, LLC.“If interest rates go up, the value of bonds goes down, which may reduce or even eliminate their financial cushion. And interest rates have nowhere to go but up. That’s a risk they’re not prepared to take.”

The problem is the optional Life Income Benefit rider that promised retirees who signed up for it at least 5% a year for the rest of their lives.

When the market was doing well, that innocent-looking add-on earned the Hartford a cozy 0.75% annual surcharge in exchange for guaranteeing a level of income well below what the underlying investments were earning.

Now that 5% has become a pipe dream, the profit center has the potential to cost the company dearly, which is why they’re offering people a lot more than the contracts are currently worth to take their cash and walk away.

“We are paying a premium above the current account value,” says Barbara Bombara, who’s running the buyback for the Hartford.

“When we look at the offer that we’re making, we do think this will be attractive.”

Anyone who wants to surrender their Lifetime Income Benefit annuity can do so with no penalty and get the full surrender value plus up to 20% of the base on which the Hartford calculates annual payments.

via thetrustadvisor.com

When an insurance company guarantees a policy watch out. When situations change and the contract goes against the insurance company you will lose.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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401(k) Fees Exposed in New Rules

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The new fee disclosure regulations are a great first step in improving the 401(k) plans in America. Although many firms will continue to hide fees by burying the disclosures in mountains of paper. I have heard that an insurance company fee disclosure document is 42 pages (in fine print). The next step is to automatically enroll participants in a age approporaiate portfolio and then allowing the participant to opt out.

The protest against the mark-up of insurance f...
The protest against the mark-up of insurance fees (2002.8.27, Taipei) (Photo credit: Wikipedia)

Fees charged by the financial institutions that administer these employee tax-deferred savings accounts are often a mystery. If you don’t believe this, go to the drawer where you keep your quarterly 401(k) statements and see if you can find the word “fee.”These statements give the dollar value of shares in different investments, such as mutual funds. Yet the performance of these investments is actually better because instead of stating fees, these statements give investment-return figures after fees have been taken out.

This omission is highly convenient for the large brokerages and insurance companies that provide 401(k) plans because it allows them to charge high fees, paid by investors who have no inkling of the hit their retirement accounts are taking. While these institutions must disclose all fees when asked, federal rules haven’t required them to voluntarily disclose these fees — until now.

Sweeping new rules from the U.S. Department of Labor are designed to shine a bright light on 401(k) fees. One of the requirements is a new format for quarterly statements that will show fees. The statement you receive in the fall will look nothing like the ones piled up in your drawer. It will include an eye-opening table showing fees and actual returns for each investment before fees are taken out.

via abcnews.go.com

Effective July 1, 2012 401(k) service providers must inform plan sponsors of all fees charged within their 401(k) plan. Effective September 1, 2012 plan sponsors must inform plan participants of these same fees. Many if not most plan sponsors have done nothing to prepare and may be deluged with questions about the fees in their plan from employees.

Please comment or call to discuss how this affects you and your company 401(k) plan.

Posted via email from Curated 401k Plan Content

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The Great Annuity Rip-Off.

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The brokerage firms, banks and insurance companies have a product for every situation. Right now the situation is fear and they feed this fear with ‘safe’ products. These firms make money when money moves. They do not make money if investors develop a prudent portfolio and remain disciplined to that strategy. Annuities help people believe their money is safe, when in fact in the long term they lose money. Best advice, stay wawy from annuities.

Souvenir Programme, inside cover
Souvenir Programme, inside cover (Photo credit: CT State Library)
Any prospective customer who takes the time to understand annuities runs away screaming. A recent report by consulting firm Cerulli Associates puts the matter as delicately as it can: “Information about variable annuity purchases reveals that they do not appear to be based on educated decisions.”
Consider the experience no-load fund giant T.Rowe Price had when it sent potential customers software to help them determine whether variable annuities were right for them. The program factored in the investors age, income, tax bracket and investment horizon — and it regularly told potential buyers that they would be better off in a plain old fund. An educated consumer, as it turned out, was not a good prospect for annuities.
If folks really knew what they were buying, how could you explain the $21 billion of annuities sold in 1996 that went into IRAs? IRAs, already tax-sheltered, benefit not a whit from the annuities deferral feature.
via forbes.com

Insurance agents and stockbrokers make a heft commission when selling variable annuities, much more than the commission on mutual funds or stocks. This hugh incentive costs consumers big in the short and long term.

Please comment or call to discuss.

Posted via email from Curated 401k Plan Content

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Should Your Company Hire an ERISA 3(38) Investment Manager for The 401(k) Plan?

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The 401(k) plan has attracted substantial attention, some wanted, some unwanted, in an effort to improve the quality of retirement plans for American workers. New regulations are being added or considered every day. For instance the new 408(b)2 fee disclosure regulations become effective later this year. These regulations are expected to change the ways plans are sold and by whom. These regulations are a real game changer.

Rewarding Eco-Friendly Farmers Can Help Combat...Because of these changes and the increased acknowledgement of fiduciary risks for plan sponsors, many sponsors are considering hiring an ERISA 3(38) Investment manager. By hiring this manager plan sponsors transfer the fiduciary responsibilities and risks to the investment manager.

The ERISA 3(38) Investment manager will follow the fiduciary process by:

  1. Developing an Investment Policy Statement (IPS)
  2. Select and Monitor Investment Options
  3. Offer Investment Education

The ERISA 3(38) Investment Manager will minimize their fiduciary liability by choosing index or structured funds.

Who can serve as an ERISA 3(38) Investment Manager?

  1. A bank
  2. An Insurance company
  3. A Registered Investment Advisor (RIA) subject ot the Investment Advisors Act of 1940.

Special note: stock brokers and broker-dealers can never be a 3(38).

Although the plan sponsor (employer) transfers all investment fiduciary risks and responsibilities to the ERISA 3(38) Investment Manager the plan sponsor must monitor the manager. This fiduciary responsibility cannot be delegated away. This entails meeting with the investment manager at least annually and review the process.

Is this for all plan sponsors?

No, however this fits well for small to mid-sized businesses who are too busy running their company to manage a retirement plan. When it fits it works very well. Not only will the plan sponsor outsource a very vital task, the plan participants will benefit from a prudently managed retirement. Ultimately, the goal is a successful retirement for the plan participants including the business owner.

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Why Variable Annuities Have No Place in Your 401(k) Plan

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Variable annuities are another way for insurance companies to hide unnecessary fees from plan participants. Many of the features when viewed over the long term are unnecessary and hurt performance. The complexity in these annuities does nothing but confuse plan participants and are might to feed their fear. In other words they help sell more insurance.

Image via Wikipedia

Annuities can make sense for a part of your portfolio especially as you reach retirement and you are looking for some stability to your income stream, but not in your 401(k).  The costs and issues in managing a 401(k) plan in your employees’ best interest far outweigh the need for providing annuities in any company’s retirement plan.

via forbes.com

When you consider all the fees involved in any annuity the benefit to the investor is very small and in most cases will result in a smaller account balance. Annuities are sold based on the fear of the client. Agents and brokers make money on commissions and will sell whatever the client wants at the time. An real investment adviser is not merely a salesperson. Sometimes being in the correct investments is uncomfortable but is the best for the client.

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

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Retirement industry changes on deck for 2012

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English: Dunwoody Village courtyard
Image via Wikipedia

The 401(k) plan has become the sole source of retirement for most Americans. The 401(k) plan was intended to be a supplement to a pension plan. The trend toward more 401(k) and less pension plans has made it imperative to control costs amd improve quality. The future retirement for most Americans is at stake. Unless, of course, you believe the government will take care of you.

Allen Vaughn, president and chief fiduciary auditor for 401-k.pro FiduciaryManagers/The 401k Advisory Group, Inc. in Dunwoody, Ga., said he believes 2012 will be the year of lawsuits.He fears the hoopla over the fee disclosure regulations will be like “watching a tornado destroy a town. … What is going to happen with 408(b)(2), one thing I advocated for, is it is going to show people the expenses, which I’m all for, that will make people smart shoppers. People need to see the benchmarks. They need to see what the average fund expenses are for record keeping, the average commission brokers make and the fee advisors make.”

Vaughn said he’s afraid that delayed rules will make it easier for companies to find new ways to hide their fees. “It gave insurance companies time to reconfigure things so they could look like they have a clean slate.”

via benefitspro.com

The delay in regulations give insurance companies and brokerage firms new and innovative ways to hide fees. No matter where the fees are, unnecessary or unreasonable fees hurt the ability of participants to retire.

Please comment or call to discuss how this affects you and your company plan, no matter what the size.

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