Be Prepared For Questions......

This past weekend I ran across a great article that all Retirement Plan sponsors should read. It is called: “Ten things DC plan sponsors need to do for '09”. Of course, all of these things should be done every year, but given the recent market fluctuations and economic uncertainty, 2009 will undoubtedly be a challenge for both Plan sponsors and participants. I would expect many more questions than usual from your employees, and they will probably focus on fees, and investment performance. So be prepared.....

Are Your Investments Secure?

A question I have been getting lately is: With all the news about companies going out of business, and banks being taken over, how can I be sure my money is safe? What happens to my 401(k) if my company goes under? What happens if my mutual fund company goes out of business?

Unfortunately, these are very relevant questions in today's market environment. Let me cover the most common investment types, and the "safety" of each.

Bank Accounts: Bank and credit union accounts, including checking, savings, and certificates of deposit, are insured against loss by The Federal Deposit Insurance Corporation (FDIC). This government agency has insured $100,000 per account holder per bank since 1980. The recent “financial bailout” signed by President Bush, has temporarily increased the coverage amount to $250,000 to help reassure depositors that their assets are safe.

401(k): If your employer goes out of business, your 401k and other retirement accounts are protected by the Pension Guarantee Corporation. Your retirement assets are separate from your employer’s assets – they belong to you. They do not guarantee you will make money in your investments, only that the assets cannot be seized as a result of failure by a company.

Mutual Funds: Mutual funds are subject to market fluctuation and therefore aren't guaranteed against market loss. However, under the Investment Company Act of 1940, your fund assets are protected if the fund company was to go out of business. Each fund is set up as a separate corporate entity, with its own board of directors who are responsible for looking out for the best interests of the fund shareholders. So, if your fund company went out of business, your assets would remain intact and, with shareholder approval, the directors could hire a new manager to oversee the accounts.

There are numerous government agencies and regulations already in place to safeguard your investments from fraud and misappropriation. However, as we have painfully been aware of the last few days, market fluctuations are something that each individual must bear. I would note that this is a great time to reevaluate your investments and level of risk you are taking.

Should Employers Give Investment Advice?

With the recent market volatility, many employee’s are questioning their 401(k) statements and employers often find themselves in a quandary: They want to help their employees with their investments, but by offering investment advice, they open themselves to liability if the employee makes an investment that results in a financial loss.

The solution was provided by the Pension Protection Act of 2006. The PPA allows plan sponsors and fiduciaries to appoint qualified advisors to provide investment advice. As long as certain statutory requirements are met, sponsors are not liable for investment performance resulting from that advice.

The Department of Labor describes a plan sponsor's overarching role as follows: “The duty to act prudently is one of a fiduciary’s central responsibilities… It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” (http://www.dol.gov/). More importantly, having a trusted adviser handling retirement plan issues means an employer can focus on what really counts – running their business!

Should I roll my 401(k) into an annuity?

401(k) refers to a section of Internal Revenue code that allows businesses to offer tax deferred savings accounts to employees. The 401(k) compares to an Individual Retirement Account (IRA), which is a section of Internal Revenue code that allows individuals to establish tax deferred savings accounts for themselves. 401(k)s and IRAs are not investments but they hold investments like stocks, bonds, mutual funds, or insurance. When investors rollover a 401(k) account they roll it into an IRA and then they choose the investments they want to hold in it.

An annuity is a type of insurance contract that can be held in an IRA. It combines fixed or variable investments with various guarantees. There are basically three kinds of annuities. A fixed annuity offers a fixed rate of return for a predetermined period of time. A variable annuity invests in stock or bond subaccounts (like mutual funds) and rises or falls in value with the underlying investments. An equity-index annuity provides a minimum fixed rate of return with the opportunity for better returns if the stock market performs well.

Many investment professionals would probably tell you it’s not a good idea to put an annuity in your IRA. Since one of the main advantages of an annuity is that your money grows tax-deferred, it makes little sense to hold one in an account like an IRA, which is already tax-deferred. However, there are exceptions where features in an annuity might make it worth considering:

• If you're retired or very close to retiring and you feel you need more guaranteed income than social security will offer, an annuity can provide an income stream you can’t outlive. The insurance company will essentially create a personal pension for you by providing you a monthly check for life.
• Fixed annuities often provide a higher interest rate than a CD. So if you are considering a CD for your IRA, you might compare rates with a fixed annuity.
• Most variable annuities provide a guaranteed death benefit. So even if the annuity goes down, the death benefit can never go lower than the original amount invested (less any withdrawals). That is an advantage for your beneficiaries that no stock or mutual fund can provide.

Annuities are usually more expensive than other investments and often have surrender charges so they aren’t the best choice for every investor. Before you invest in anything it makes sense to analyze the features, costs, and what's right for your particular situation.