How to Evaluate your Retirement Account

The Department of Labor, which oversees ERISA regulated retirement plans, recently adopted new rules requiring financial advisors to adhere to what is referred to as the “fiduciary rule.”  When advisors give recommendations on retirement accounts, they will have to put the interest of the client ahead of their own.  This includes recommendations to buy or sell investments, and also shifting assets to different plan types, such as rolling over money from an employer-sponsored 401(k) into an IRA.  The main focus of the ruling is around disclosure of fees.  Herein lies the challenge, especially with the many new low-cost and robo-investments available, and I’ll show you the solution.

The structure of 401(k) plans allows employers to share both administrative and investment related expenses with plan participants.  As a result, it is very difficult for even investment professionals to assess the true costs.  In 2012, the DOL and Treasury finalized new rules requiring additional transparency of fee disclosures to both plan sponsors and participants of ERISA plans.  Employers are required to disclose both plan level and investment level information, including complete disclosure of fees and expenses.  These rules, along with the new fiduciary standard, are great steps towards the type of transparency the public deserves.  But let’s dig a little deeper, and peel back the layers using a specific example to reveal just how complex it is to evaluate fees and expenses for your IRA or 401(k) account.

Let’s say you move your IRA to Charles Schwab, and start exploring different investment choices.  Schwab markets its Intelligent Portfolios as having “changed investing forever,” and promotes the product as having “no advisory fees, no commissions and no account service fees. period.” Wow, sounds pretty good, right?  The disclosures include this:  “Schwab affiliates do earn revenue from the underlying assets in Schwab Intelligent Portfolios accounts. This revenue comes from providing advisory and other services to Schwab ETFs™ and providing services relating to certain third-party ETFs that can be selected for the portfolio, and from the cash feature on the accounts. Revenue may also be received from the market centers where ETF trade orders are routed for execution. ”  What in the world does this mean? The detailed 17 page disclosure document says that Schwab affiliates receive advisory fees for managing the ETF’s used in the program, and also shareholders of those ETF’s also pay administrative, distribution, transfer agent, custodial, legal, audit and other customary fees and expenses.  It also reveals that although clients who invest in the Intelligent Portfolios do not pay commissions, but broker-dealers other than Schwab that is acting as principal to buy or sell ETF shares, and adds a fee called a “spread” which is not shown on the client’s confirmation or statement.  I have worked in the investment industry for a long time, and I have no idea what the overall expenses paid by investors in the Intelligent Portfolios would be.  Your 401(k) plan presents the same problem, as fee arrangements have similar complexity and hidden expenses.

So how can you, as an every-day investor, make good decisions within retirement accounts with all these hidden fees?  Calculate your net total return on your account versus appropriate benchmarks.  It is that simple.  Many people come to me wondering why their annuity or managed investment account has not made very much money during times when the stock market has been good – it is often the high cost associated with such products that causes the underperformance.  The DOL fiduciary rule is a step in the right direction, but does not necessarily provide full transparency that it intends.

Source: Schwab.com © 2015-2016 Pawleys Investment Advisors, LLC. All rights reserved.

How Simple is the SIMPLE? – IRS Form 5304 and 5305

For many employers with fewer than 100 employees, the easiest and most cost-effective way to offer retirement plan benefits is through the SIMPLE IRA. In the mid 1990’s, the SAR SEP or Salary Reduction Simplified Employee Pension Plan, was discontinued and replaced by the Savings Incentive Match Plan or SIMPLE. This plan enables employees with at least $5,000 in annual compensation to defer as much as $12,000 of pre-tax dollars. The employer has the choice to match $1:$1 up to 2% of compensation for all eligible employees or $1:$1 up to 3% of participating employee contributions. The one caveat, which is quite frankly confusing to me, is that the IRS imposes a 25% penalty for SIMPLE funds moved within 2 years of participation, even if the dollars are rolled into an IRA, with limited exception. Unlike many other plans, the SIMPLE does not require annual form 5500 filing or other paperwork filing with the IRS. Employers simply need to provide annual notification to employees of the plan details and administrative information. Each employee account is self-directed, so I have built plans which have basic investing education for employees as a key component.

Establishing a retirement plan is an important aspect of a solid employee retention program. It also provides a way to provide a meaningful positive impact on the financial futures of your staff and their families. Please call today to discuss how this fits your situation, you will be amazed at how easy it is to get started! 🙂

p.s. you will also be eligible for a tax credit during the first 3 years!

© 2013 Pawleys Investment Advisors, LLC. All rights reserved.

Business Retirement Plan Participant Workshops – Increase Employee Participation

The single best way for business owners to increase retirement plan participation is through employee engagement. You are an expert at engaging your staff in executing the work of your company. I can engage employees in your 401(k) by motivating your team to take control of their financial futures. Here is the outline to a three session program that I can deliver in-person or virtually:  Company Retirement Plan Workshops from Pawleys

Please e-mail or call today for additional information  – I will do everything possible to be of assistance to you.

© 2013 Pawleys Investment Advisors, LLC. All rights reserved.