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AdvisorNews - December, 2010

Financial Planners Give Five Common Mistakes When Retirement Planning

Knowledgeable and experienced financial planners can make all the difference when it comes to a successful retirement; here are five common mistakes people make that can adversely affect their retirement income

BOSTON, Oct 06, 2010 /PRNewswire via COMTEX/ -- Since there are complicated aspects of retirement planning, many people choose to work with professional financial planners in order to better ensure a comfortable retirement. In addition to accumulating an appropriate-sized nest egg, retirees also need to consider their debt, amount of insurance, inflation, other sources of income and how to protect their investments. offers five common mistakes that people make when retirement planning that can greatly affect their golden years.

  1. Retiring with too much debt. Financial planners will generally recommend not retiring until credit card, mortgage and other forms of debt are paid off. These monthly payments can quickly cut into savings, which will be paying for past expenditures - plus interest and current expenses. Increasingly, Americans are entering traditional retirement years with heavy debt.
  2. Not buying enough insurance. Although people over the age of 65 are eligible for Medicare, they will still have additional healthcare costs that are not covered. Depending on coverage, many items are not covered, such as premiums, deductibles, coinsurance, eye glass coverage, hearing aids or long-term nursing home care for longer than 100 days. Guidance from a professional is recommended if the family has significant assets to protect.
  3. Not taking inflation into account. Inflation will slowly decrease the spending power of savings. However, there are steps that can be taken to avoid this. Social security, some annuities and pensions are adjusted for inflation annually. Treasury Inflation-Protected Securities (TIPS) are a government bond that promises a rate of return that exceeds inflation.
  4. Depending on one source of income. A certified financial planner may recommend having four to six sources of retirement income without counting on just one. By diversifying, retirees can avoid losing all their income if one source loses value. Guaranteed sources can include Social Security, pensions and annuity payments. Other common sources can be 401(k), IRA, CDs, personal investments, cash investments, rental properties and royalty income.
  5. Not protecting savings. About five to ten years before retiring, people should start to focus more on protecting their savings rather than growing them. People can reduce risk by shifting assets to more conservative investments, avoiding borrowing or taking early withdrawals and minimizing fees and taxes deducted from savings. More funds should be placed in low-cost investments and traditional and Roth retirement accounts.


Cash Balance Plan Sales Tips


We asked the most successful advisors in our Cash Balance network to share their best sales tips. Here's their advice:

  1. Develop a "champion" and limit the size of your sales audience.

In companies with many partners or owners, it may be difficult to sell everyone on a Cash Balance Plan at once. Instead, identify a "champion" within the company - the executive you need to convince first. Win him or her over, and that support can help sell it to the rest of the company. Limit early meetings to a small group and include the managing partner or executive director who will be able to answer your key questions.

  1. Involve the firm's CPA/tax advisor early in the process, and get him to think it was his idea. CPAs do not like to be left out of any major financial decision a firm is making. The last thing you want is to spend time developing a Cash Balance Plan for a company, only to have the CPA put the kibosh on it because he wasn't consulted early enough in the process. Bring the tax advisor in early and use hard data to illustrate the benefits of a Cash Balance Plan for the firm (Kravitz can help). The tax savings are so significant that with education and supporting materials, the CPA will likely be eager to recommend the plan.

    3. Taxes, taxes, taxes! ("Are you looking for a larger deduction?") Anxiety about rising tax rates is a key motivating factor for business owners and high income professionals today. Tax liabilities are the biggest expense after payroll for many companies, and everyone is looking for a break. The Cash Balance story has never been more compelling. A simple question like "Are you looking for a larger deduction?" is a great way to open the door, and hitting the tax message throughout the selling process is key. 4. Remind the prospect that "Cash Balance is your safe money."

In today's climate of market volatility and uncertainty, the conservative nature of Cash Balance Plans is highly appealing. Top advisors emphasize to their clients the security and stability of a well invested Cash Balance account. This approach also opens the door to discussions about the opportunities for meeting clients' long-term objectives, including their after-tax money and profit sharing investments. 5. Build your business by helping a key center of influence build his business ("you scratch my back, I'll scratch yours")

Many successful advisors we know have built strong partnerships with CPA firms, especially firms targeting a similar niche, such as legal or medical groups. They ensure that there's a constant stream of referrals going back and forth between the two businesses. Both firms work together to use Cash Balance Plans as a tool for expanding business.

Get in touch -- we're here to help you have a successful Cash Balance selling season. Remember, 75% of all Cash Balance Plans are sold between October and December. Good Selling!

PS: The most effective selling tool is a personalized Cash Balance illustration showing the company's owners how much they can save on taxes and how much they can put away for retirement. We provide this service free.


Avoid Fiduciary Liability When Choosing the Class of 401(k) Funds

OK, you finally have the 401(k) plan running smoothly. You allow the participants to direct their own investments from a menu of mutual funds, some of the best funds on the market. In fact, you even hired an investment consultant to help you pick the funds. Your committee meets with the consultant periodically to be sure the menu is still good, and once in awhile you replace a low-performing fund with one promising a better performance. Nothing else for the committee to worry about, right? WRONG!

The Fiduciary Issue

Not only do you need to be sure you're offering a good selection of funds for your employees, but also you need to be concerned with the expenses and fees being charged by the investment options. Well, that's not a problem, you say. In fact, the participants don't even have to worry about paying for the 401(k) plan. Instead, you have an arrangement with your recordkeeper and your consultant that neither of them invoice for their services at all. In effect, the 401(k) plan administration is "free." Oh, really? Doesn't cost a thing, huh? Your service providers are administering your plan out of the goodness of their hearts? Of course not.

Today, 401(k) service providers often receive payment from the investment funds offered to plan participants. For marketing the funds, the administration and investment firms receive "12b-1 fees" or revenue sharing. These fees are embedded in the expenses the funds charge for investment. The fees come off the top, before earnings are calculated and before plan participants receive a return on their investments.

As a member of the investment committee or other fiduciary for the 401(k) plan, are you aware of how this works? More importantly, are you aware that in many cases you could offer the identical investment fund with lower expenses and fees, thereby providing participants with higher returns?

The Tibble Case

A federal court recently held that an investment fiduciary must know if different classes of a particular fund are available, and must know the differences in expenses charged. Finally, the case held that unless there is a good reason for offering a class of a mutual fund with higher expenses, a fiduciary will be liable to the plan for the payment of excess expenses.

Tibble v. Edison International was decided following a three-day trial. It was one of many excess investment fee cases that have been brought since 2007 against large companies such as Boeing, Bechtel, Wal-Mart and Deere. Many of the cases have been dismissed by the courts, in favor of the employers, and others have been settled. More recently, several cases have survived summary judgment and will be tried, absent a settlement.

Notably, in the Wal-Mart case the Federal Eigth Circuit reversed a summary judgment in favor of the employer. It stated that the use of retail funds in that plan represented a failure of "effort, competence and loyalty." Tibble is the first to actually go to trial, and the results were not good for plan fiduciaries.

Tibble involved several mutual funds offered for investment under the Edison 401(k) Savings Plan, maintained by Southern California Edison Company. Some of the mutual funds were share classes charging higher expenses and fees (retail class), although the identical mutual funds were available to the plan at lower expenses and fees (institutional class).

For example, a particular mutual fund may offer Class A, Class B or institutional shares. The investments in all classes will be identical, but each class will have a different expense structure. Class A might be a retail class and charge a load or commission when the fund is purchased, but no fee when it is sold. Class B may be another retail class with no load when it is purchased, but with a 12b-1 fee payable to the plan recordkeeper. Finally, an institutional class might be offered with no load and no 12b-1 fee, but it may require a minimum dollar amount for investment.

In Tibble, several of the mutual funds were retail classes. A part of the fees charged by those funds was used to compensate the plan administrator. The plan's investment committee did not review other classes available for the same mutual fund. Instead, they took the recommendation of their consultant and never inquired about the fees. The mutual funds in question also offered institutional classes with lower expenses. The committee could not show any credible reason why the higher expense retail classes were selected. Accordingly, the Court found the fiduciaries liable to the plan for the excess expenses paid for the retail classes. In addition, the fiduciaries were liable for the loss of "investment opportunity" on the excess fees the participants paid.

Interestingly, there was a minimum amount necessary to utilize the institutional classes, which the plan would not have met when the funds were first added to the investment menu. However, evidence produced at trial indicated the minimum would have been waived if only someone had asked. But no one asked for the waiver.

The Court found the fiduciaries breached their ERISA duty of prudence. It was imprudent for the committee to offer the retail class of mutual funds with higher expenses, when the identical funds could have been made available to plan participants at a lower expense, and when no good reason was presented for using the more costly retail class.

How Does This Affect You?

So what does this mean for your plan? First, Tibble does not hold that offering a retail class of a mutual fund is always a violation of ERISA. Instead, the Court held that plan fiduciaries need to show a legitimate reason for using a retail class with a higher expense. In Tibble, the fiduciaries were unable to do so.

Second, a lower court case is normally not considered as precedent for future cases. On the other hand, it does give an idea of what one judge thought of this set of facts. A representative of a large national administration firm recently said to me, "This ruling will turn the entire 401(k) industry upside down." Perhaps that is correct. There is no question that the trend (and the law) is toward more and better disclosure of fees and expenses to the plan participants. The Tibble case fits right into that trend.

Third, in Tibble the committee argued that they relied on their consultant's recommendations on what class of the funds to offer. However, the Court ruled that the committee still had the duty to ask about the various classes of a particular fund and the expenses of each class, regardless of whether the consultant discussed the issue.

It remains to be seen if the Tibble case will indeed turn the 401(k) industry "upside down." At present, the case has not been appealed. If it is appealed and the decision is upheld, the precedent will be established, at least in the Federal Ninth Circuit, which covers California.

No matter what future courts do with the Tibble case, it is clear the U.S. Department of Labor (DOL) agrees with the decision. The DOL has been filing Friend of the Court briefs in several investment fee cases.

For example, in an excess fee class action brought against the Unisys Corporation Savings Plan, the DOL favorably cites the Tibble case: "In light of the fact that the institutional share classes offered the exact same investment at a lower fee, a prudent fiduciary acting in a like capacity would have invested in the institutional share classes."

Does It Really Matter?

Several clients have commented: "We just use the higher fees of the retail class to pay the administration firm, so if we start to use the institutional class, we'll have to charge the plan directly for the administration expenses. What's the difference? Either way the plan pays the fees." One difference could be what participants have been told. Do they think the employer is paying the expenses or do they understand they are paying the expenses by receiving a lower return? Here's another difference:

Assume two participants have $25,000 accounts in a 401(k) plan. Participant A is invested in several retail class mutual funds that pay revenue-sharing fees to the plan administrator. Participant B is totally invested in a money market fund, which pays no revenue sharing fees. So Participant A is paying plan administration expenses, but Participant B is not. On the other hand, if administration expenses were charged to the plan as a whole, and allocated based on account balances, both Participants A and B would be paying the same portion of plan expenses. Which of these alternatives is more fair and reasonable? Each plan will need to answer that question. As a plan fiduciary, you should clearly understand the results of how the expenses are being paid and be sure plan participants also understand the process.

Steps To Consider

What should your investment committee do now?

Investigate to find out whether your investment menu has retail or institutional classes of mutual funds.

If your plan is using higher fee retail classes, ask your adviser to justify the decision. If the justification seems reasonable, be sure you and the plan participants understand how fees are paid and by whom. If the justification does not seem reasonable, consider using a lower expense class.

If you are told you cannot use an institutional class of a particular mutual fund because of a minimum investment requirement, be sure you or your adviser asks for a waiver of the minimum. Even if the answer is 'no,' you will have evidence that you asked.

Document everything you do. Tibble is another in a long line of cases that makes it clear it is the process by which fiduciaries make decisions that determines whether they were prudent, not necessarily the results of those decisions. Be sure to follow a reasonable process, and be sure to document each step along the way.

In conclusion, 401(k) plan fiduciaries should always take appropriate steps to keep plan expenses as low as reasonably possible. If they determine that higher fees are reasonable in a particular situation, they should document the process used to reach that decision.


Bundled 401(k)s May Be Ripping Off Your Clients

A new DOL regulation will ratchet up the scrutiny of bundled 401(k) plan fees. You can help your plan sponsors, and potentially their plan participants, by guiding them through the pros and cons of bundled vs. unbundled services. In the process, you can also deepen your relationship with them.

Bundled services are a single company providing all 401(k) plan services including administration, recordkeeping, custody, investments, and investor education, packaged together as one fee. Traditionally these services have been positioned as one-stop shopping or 401k in a box, offering simplicity, brand names and low costs. It's been reported that bundled services have around two-thirds of the small plan market.

The reality is bundled services have the potential for conflicts of interest with proprietary funds, soft dollars, and undisclosed fees. This makes it difficult for plan sponsors to fulfill their fiduciary duty in verifying participant costs are reasonable. As a result of these drawbacks, plan participants could suffer and plan fiduciaries might be exposed to unnecessary liability.

An alternative to bundled vendors is to separately contract with different vendors for each service. This unbundled approach typically includes a national trust company, a regional/national third-party administrator (TPA) and an independent financial advisor (FA). In spite of the advantages this model provides, explaining why three versus one service provider is a good thing can be a challenge.

Plan sponsors can fall into a comfort zone with the current vendors and fail to implement proper fiduciary safeguards. They can also be reluctant to services that seem complex when their perception of current services is that they adequate serve their needs. Anything different from a 401k in a box may seem completely unnecessary for some. Even improved fee transparency can work against unbundled services if plan sponsors have never been exposed to service fees. It's also intuitive to think three vendors must be more expensive than one. Be prepared to help the committee develop meaningful measurements for 401(k) success.

Considering and weighing different retirement plan service options are very similar to how the company manages its regular business. Having multiple vendors competing for your services provides decision makers with valuable information that offer insight and generate cost savings. If vendors do not know how their competition is bidding, they often bid more aggressively. Unbundled vendors tend to get-it in terms of transparency and competitive pricing.

Breaking services down by vendor can also be easier to make changes. Plan sponsors do not like feeling trapped in a miserable services relationship but it happens frequently. Vendors will try to manipulate the relationship to protect them from being an expendable commodity. Often plan sponsors feel they aren't reaching the levels of stewardship they would like to attain but the process of going through a request for proposal (RFP) process can be overwhelming. Plan sponsors are often unfamiliar with how to evaluate vendors or ascertain the true cost of services that have had little disclosure in the past.

The role of the independent FA role with 401(k) services is gaining in importance. Even the initial conversation of why unbundled services are the choice of many large plans can set in motion a robust fiduciary process. The FA who accepts a fiduciary role provides critical oversight benefits. FAs can enhance the fiduciary infrastructure of the plan and provide fiduciary assessments as well as ongoing education for the investment committee. If a plan sponsor needs assistance in selecting a new service provider, FAs often quarterback the request for proposal (RFP) process. When independent fiduciaries are brought on to assist the plan sponsor with a bundled service in place, it's amazing how quickly vendors offer to reduce their fees.

With the new fee and fiduciary disclosures expect plan independent FA services to be in higher demand. The flexibility, competitive pricing, and commoditization of vendor services allow fiduciaries to have the control needed to manage the plan more effectively. Once the plan sponsor chooses this method they would be hard pressed to ever go back to a bundled service. Having unbundled services from a fiduciary perspective is a lot of fun as well as effective.

Bundled solutions may be hurting your clients in providing employees a chance of a financially sound retirement. In the dawn of the fiduciary standard, FAs should be wary of the 401(k) in a box and have a back-up plan if you have clients using this model. Otherwise you could open yourself to unnecessary liability or lost business. Unbundled services may be a better answer and give your clients better stewardship.

Unbundled won't always win. Your inquiry may push down fees and inspire
more favorable terms from your bundled provider. But you can't know the outcome unless you try it first.

But just like a bundled service, the same mistakes can occur in an unbundled service. However the pick-up in effectiveness, transparency outweigh the service risks by far.