2012 Concerns That Did NOT Happen.

During 2012 we were worried about several things that would have a negative impact on the financial markets. The financial media made sure you were fully aware of these ‘events’. After all, the media’s strategy is, if it bleeds it leads.

market 1
market 1 (Photo credit: tim caynes)

Below is a list of the things that did not happen in 2012.

  • We did not fall off the fiscal cliff.
  • The euro zone did not fall apart.
  • China’s economy and stock market did not crash.
  • The bond market did not implode.
  • The re-election of President Obama did not derail the U.S. market.
  • Doomsday did not arrive on December 21, as the Mayan calendar may have suggested.

Given these possible events the stocks around the world had a solid year in 2012.

Many of the people I talk with remain pessimistic about the future. What if this happens or that happens? They ask. I’m not sure what will happen either short or long term. What I do know is that things will change. The only thing that doesn’t change is that things change.

Rather than trying to predict the future, which no one can consistently do, I follow my investment philosophy, which is that markets are efficient.  In that all the knowable information is in the current price of securities. Any predictions made are a guess. The markets going forward are random.

I believe that free markets work. I believe that economies around the world will continue to grow. What I do not know is what sectors or industries or products will grow.

Therefore we must remain diversified and disciplined.

There will always be short term volatility. My role as an investor coach is to keep investors focused on the long term. Trying to time the markets or pick the right stocks will lead to poor results, long term.

Your goal as an investor is to reach your long term goal. This is not done by earning the highest return possible. Earning the highest possible return can be accomplished in the short term, however it cannot be accomplished long term.

UNLESS, you believe that earning the market rate of return is the highest possible return.

The markets may not be perfectly efficient at all times, however they are far too efficient to take advantage of and improve returns.

Let’s reduce your anxiety and improve returns, long term.

To succeed long term you must own equities..globally diversify..rebalance.

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401(k) Fees Exposed in New Rules

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.

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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What’s your retirement number?

The secret to proper retirement planning is to start as early as possible. Just like you mortgage the longer the time to save the less per month you have to save. You are the one who must decide how you want to live after you are no longer able to work.

Save Money
Save Money (Photo credit: 401K)

— Inflation assumption: 4.5 percent (higher than where we are today, but most economists believe that inflation is headed up in the coming years).– Rate of investment return both before and after retirement: Consider your risk tolerance and err on the side of being conservative. If you’re stuck, use 4-5 percent. Obviously, if you use a higher rate of return, the calculator will ultimately determine that you have to save a smaller amount. After our Great Recessionand financial crash, I probably don’t have to tell you that higher return assumptions may not always work out as planned.– Life Expectancy — if you are younger than 50, use 95; if you’re older than 50, use 90. If you want a closer estimate, go to www.livingto100.com and use their Life Expectancy Calculator.

Saving for retirement is just the opposite of paying your mortgage, The longer the mortgage the lower the payment, obvious right? When saving for retirement the longer the savings time the lower the required savings rate. Many saving for retirement delay the start of their savings plan and then try to make up for it by taking additional risk. It might work but it’s doubtful.

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

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Stop Guessing – Start Planning > Plan Investments – Does more mean better?

Compound interest growth of a 20% return on a ...
Image via Wikipedia
Many investors believe that the more choices the better. This has been proved time and again not to be true. Many participants look only at past performance to determine what to invest their 41k money in. This in most cases will lead to inferior results.

Given the fact that the decision to add more funds is made by plan fiduciaries (who are bound to act solely in the best interest of these participants) you might assume that the average participant is better off as a result.

Not so fast. If you refer to Dalbar’s annual Quantitative Analysis of Investor Behavior, you’ll see that average participant’s actual investment returns still lag market returns by 60-70+% per year. The 2011 QAIB report, for example, quotes a 20-year average equity investor’s annual return of 3.83% while the S&P 500 average return for that same period was 9.14%. These results are fairly consistent with the annual results over the past decade.

2011 Dalbar QAIB

To me this means providing participants with a high-quality, diversified fund line-up is not enough. Whether it’s a lack of time, talent or interest, the average participants have not demonstrated the ability to invest appropriately on their own. Participants need tools and resources to help them make informed decisions about their retirement savings and investing. Moreover, making tools and resources available is not enough, plan fiduciaries should monitor the usage of these tools to make sure they are used appropriately and have a positive effect on participant behaviors.

This study illustrates why plan sponsors need to exclusively offer managed portfolios to their participants. Offering individual funds only confused participants and empowers them to make imprudent decisions regarding their retirement plan.

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

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Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans

401(k) Fee HELP Hearing Mitchem
Image by House Committee on Education and the Workforce Dem via Flickr

Defined Benefit: Plan Sponsor Bears Risks

Plan sponsors more or less guarantee a predetermined benefit to participants in traditional pension plans. This is why they’re called defined benefit (DB) plans. Whether plan sponsors spend wisely or foolishly on their plans, the sponsors are still on the hook for paying the agreed-upon pensions to their retirees.

For example, let’s say a plan sponsor invests in a global index fund with an expense ratio of 2% instead of 1%. The additional 1% in expenses has no direct impact on plan participants’ retirement income because participants’ benefits are set independently of investment returns. Also, the extra 1% in expenses comes out of the plan sponsor’s pockets, not the plan participants’. Pensions’ investment portfolio assets belong to corporations, not employees. This contrasts with the situation for defined contribution plans.

Defined Contribution: Plan Sponsors “Off the Hook” for Benefit Level

Plan sponsors make no promises about the level of benefits that participants in defined contribution plans will receive. In fact, the only thing participants know for sure is what is contributed into their defined contribution (DC) plan. The plan sponsor isn’t even required to contribute to participants’ retirement. Moreover, in contrast to the DB situation, the assets in the DC plans don’t belong to the corporation. They are held in trust for the benefit of the participants and their beneficiaries.

Here’s why plan expenses matter in 401(k) plans: The level of portfolio returns will affect the participants’ retirement income. Expenses—along with contributions and investment performance—are an important factor in long-term returns. Plan participants bear all of the risk if their portfolios don’t return enough to provide the retirement income they anticipated.

Higher expenses mean lower returns. This is why DOL sets high standards for DC plan sponsors’ expenses, yet pays little attention to expenses of their DB peers.

Plan sponsors maintain the responsibility to monitor plan expenses. The new fee disclosure regulations will show employees that they the employees are paying all or most of the fees associated with their plan. Questions will begin soon after the regulations take affect January 1, 2012.

Please comment or call to discuss how you will be affected.

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