Recently Wal-Mart has been in the news.  No not because of the holiday sales or how sales were on Black Friday.  Wal-Mart employee Jeremy Braden has taken his company to court over excess fees associated with their 401(k) retirement plan.  A lower court ruling was recently overturned on appeal.  The appellate panel, citing a 6^th Circuit opinion that said information is material if there is a substantial likelihood that nondisclosure “would mislead a reasonable employee in the process of making an adequately informed decision regarding benefits to which she might be entitled.”  The information referred to is the disclosure of revenue sharing arrangements and other information related to the 401(k) under the Employee Retirement Income Security Act (ERISA). 

In Braden’s complaint, he estimated that fees cost the plan $60 million over the past six years and will continue costing approximately $20 million per year in excess fees.  Braden complaint says seven of the plan’s ten funds charge 12b-1 fees from which participants derive no benefit. 

We couldn’t agree more.  Not surprisingly Bank of America Merrill Lynch is the trustee for the plan.

The complaint also alleges that despite the very large pool of assets, the ten funds available offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investments. 

Again, we agree with Braden. 

Another point Brandon made was that no changes to the plan investments were made despite the fact that most of them underperformed the market indexes they were designed to track. 

At this point, Braden should be protected under Whistle Blower laws.  Wal-Mart has a history of terminating troubling employees. 

It appears to us that both Wal-Mart and Merrill Lynch do not understand their fiduciary duties.  There is no reason why a plan of this size in not in institutional shares.  We would also question the need for 12b-1 fees.  The amount of estimated fees collected by Merrill Lynch is astonishing.  In previous reports, Wal-Mart required Merrill Lynch not to disclose its fees.  Unfortunately, at this point, ERISA and the Department of Labor still do not require full disclosure. 

Lastly, a simple review of the investment selection on a regular basis would suggest a change in investment line-up.  Apparently, neither Wal-Mart nor Merrill Lynch thought this was necessary.  Mr. Braden has really hit the ball out of the park.  He has nailed this 401(k) retirement plan as being a revenue generator for Merrill Lynch.  Like most bundled plans, the employees are captive to the plan and to poor fiduciaries decisions. 

When we work review 401(k) retirement plans, the fiduciary responsibility comes first.  Apparently, Wal-Mart and Merrill Lynch do not see it that way. 

It is important to recognize with businesses of any size and retirement plans of any size that the plan sponsor act as a fiduciary at all times when making decisions on their retirement plan.  Regular review of the plans investment selection, fees, performance and service are vital to the responsibility held by the fiduciary.

Well today it was announced that Social Security will not provide any increases for the next two years.  This coupled with increases in Medicare means that seniors will have to dig deeper for savings to met their bills while for others, they will look for ways to decrease monthly bills.  We always have promoted saving while your younger.  Our retirement plans such as 401(k) and 403(b) that we provide have the best investments and lowest costs.  In that regards, we were contacted by the Star Ledger to comment on the needs of those on Social Security and how to address the frozen increases. 

The link to the Star Ledger page is:

http://www.nj.com/business/index.ssf/2009/08/surviving_shrinking_social_sec.html

This article by Leslie Kwoh provides suggestions on cutting back your bills.

We started looking at asset allocation or target date mutual funds several years ago.  Found mostly in 529 education and 401(k) retirement plans, these funds tend to be used most by individuals that self-manage their assets. 

Target date mutual funds are designed with a glide path that adjust the equities, fixed income and cash portfolios of the funds over a period of time.  The adjustment occurs by moving more of the equity assets toward the fixed income allocation as time expires, and a fund approaches its designated end date. 

The Department of Labor determined that for 401(k) retirement plans, target date funds would be a better default investment than a stable value fund.  The decision was made just before the recession hit, causing many individuals to lose valuable assets in a fund they do not understand.  Target date funds have been included in the investment selection of retirement plans for several years, however this is the first time they are being considered as the default investment.

Likewise with many 529 education plans, many investors find it easier to place the assets in a self-contained allocation.  As a child moves up through grade school and high school, the assets are moved toward fixed income and cash.  Unfortunately the recession has devoured most of the gains, and many will fall short of their savings for education goals. 

There are almost 200 funds that have a target retirement date of 2020.  This list  includes all mutual fund companies with multiple share classes.  The number of funds are similar for each  target date fund from 2020 through 2050.  This adds to the confusion of what is suggested to be a basic investment for uninformed savers.  A target date of 2020 would suggest that you are planning to retire at age 65.  Thus, based on your current age, you would select the appropriate date fund.  For example if you are 40 years old, you may select the 2035 fund. 

If you are thinking about using target date mutual funds, there are three main points to consider:

1. Consider your other assets
2. Consider the costs
3. Consider the risk, glide path and allocation

Many investors are using these funds as the default for their investments.  These funds may be best for savers with little or few assets, because the funds provide them with a saving process to help achieve their goals — be it education or retirement savings. 

If an individual has other assets, though, these funds may only negate the allocation of their other assets – and possibly put their overall asset allocation in an unbalanced position.  You must examine all of your assets when considering using these types of mutual funds. 

These age-based funds are typically made up of the same mutual fund companies as other mutual funds.  So, for example, the T Rowe Price 2040 Fund is made of other T Rowe Price mutual funds in a percentage that will achieve an asset allocation that will assume retirement in the year 2040.  Keep in mind, however, that this adds a management fee on top of the management fee of the associated investments. 

While these so-called fund of funds simplify investing for some, they also cost more for those who may need it the most.  Add to this the commissions and sales charges, and these investments can quickly turn into a costly venture. 

Much of the alleged simplicity can be obtained by investing in separate funds with the proper allocation – and with similar adjustments as you need them. This provides you with more control over the costs and the investment allocations. 

This brings us to the glide path, which is the fund manager’s way of adjusting the investments as time expires and the final date of the fund is achieved.  The investments are moved from equities to fixed income over a period of time.  Fixed income is considered safer at a time when there is the anticipation of drawing down on the investment for its intended use, be it education or retirement. 

Each manager of the varied mutual fund companies determines their own glide path.  We compared the target date funds of 2020 for several fund companies, and found a wide variation in asset allocation not only in the same period but nearly a year later. 

Chart 1: Data as of June 30, 2008, according to company web sites. 

Chart 2: Data as of March 31, 2009, according to company web sites.

Our research considered several of the companies providing these funds.  The charts above show the asset allocations between equity, bonds, cash and other.  These charts really point out the differences in the managers’ intent to provide the largest gain by taking a bigger risk. 

In chart 1, we can see that Alliance Bernstein holds 80 percent in equities while Barclays holds only 62.2 percent.  These strategies will provide very different year-end results and possibly over time in the long run. Investors really need to consider their risk tolerance when choosing which fund is better for them. Unfortunately, these allocations are rarely considered by investors when they place assets in these funds.  Risk and reward should be a part of any decision-making process when selecting which mutual fund company to place your assets in. 

When we compare Chart 1 with Chart 2, we can see that the equity portions of the allocations with Vanguard have increased 6 percent, and yet for Barclay’s it dropped nearly 5 percent. Once again we can see that a manager’s style varies greatly with target date funds. To determine who is correct we would need a crystal ball. 

Target date funds were created to provide investors with a one-size fits all approach to investing. Place your assets in a particular fund, the thinking goes, and the managers will provide an allocation for you. 

We have provided three key reasons as to why they do not work for everyone. But also consider this: When picking a fund, it is just as important to consider the funds in which the target date fund invests. Investors almost need to evaluate the entire mutual fund company because they need to understand the costs and risks of all the managers associated with the investment. 

These are not a one size fits all investment. 

The economy has affected our savings, retirement plans and home values.  The values of our college savings for our children have diminished.  Now what can we do to make the best of the remaining time to save before entering college?

Participation and ownership is needed from the child.  We suggest a three-pronged college funding approach to paying for college.  The parent chips in a third through savings, earnings and appreciated stock.  The child chips in a third through scholarships, grants and their savings.  The final third is taken out through loans in the child’s name first, then the parents.  The parents and/or grand parents can then come back at graduation time and give a gift of paying down some of the loans.   

There are several ways to save for college.  529 plans are the most common but have taken a beating just like other investments in recent months.  With college costs still going up, is it worth the investment?  We say yes it is.  The ability to save taxes on the growth of the investment will be worth it.  While there are several ways to save for education, the 529 plan is still the best method to save for college.

Let’s look at some new changes for the 529 plans.  The IRS has a special rule for 2009 that permits two investment changes for this year only.  Normally only one investment change per year is permitted.  Investments have not performed as profitably as we all have hoped.  Here is an opportunity to modify your investment selection based on the current value of your account and your anticipated additions. 

If you have not been happy with your 529 plan consider a rollover to another plan.  You can roll over one account to another without a tax hit as long as it stays custodian to custodian.  You can change to any state plan, but you should consider any benefits offered from your home state first.  Several states such as New York provides that   contributions to any of New York’s 529 plans of up to $5,000 per year for an individual taxpayer, and $10,000 per year for married taxpayers filing jointly, are deductible in computing New York taxable income.  You should weigh your home state benefits with the costs and investment options.  So for example while New York offers an income deduction, the fees associated with an advisor sold plan range from 0.52% to 2.73% depending on the share class used.  Consider weighing the age of the child along with the state benefit versus the cost and potential gain in the plan.  Sometimes it is worth going outside of your home state for a better plan. 

Some plans charge sales charges or back-end loads of as much as 5.75%.  We find this excessive.  High costs really eat into your investment gains.  With the account values down, the higher cost investments are magnified and take more of the remaining value.  Consider a plan with lower costs.  In most cases low-cost plans have better investment options, which may perform better in the long run.  States that have low-cost direct sold plans include Alaska, Maryland, Nevada and West Virginia.  These plans have costs that run less than 1.00%

For accounts where you know you will not be able to make up the difference and you anticipate the account value will remain at a loss, you may instead want to consider liquidating your “underwater” 529 account and claiming the loss as a miscellaneous itemized deduction on your 2009 taxes.  What do you do then?  If your child is in high school, it may be best to save in a regular taxable savings account.  If your child is younger, you may want to start a new plan by review the various options as previously mentioned. 

Education savings should be reviewed just as all other assets on a regular basis.  Changes should be made where one can find improvements.  There are many 529 plans to choose from and careful review is necessary.

Tax season is a good time to review your US Savings Bonds.  Many people are holding matured bonds that no longer earn interest.  When mature bonds are not cashed in, they are in violation of IRS statutes and risk fines and penalties for owners. 

Taking the time each year to review your savings bond maturity dates can not only help save fines and penalties but can also help you manage your assets better.

Savings bond owners have the option of paying tax two ways.  The first and most used is to report interest when you receive it.  Usually, this is when you redeem the bond. 

The second is to report the increases in the value of the bond as interest each year.  Either way, you will receive a 1099-INT when the bonds are redeemed. If you use the second method, an adjustment to this interest is made by letting the IRS know you reported the full amount of interest on previous returns.  The IRS does permit you to change from one method to the other.

People with mature bonds will pay a lump of tax and miss out on the financial planning side of holding these bonds.  These bonds are free from state taxes so there are no worries there.  One goal of financial planning is to reduce your taxes.  For the retired living on fixed income, a large tax hit can really affect your budget.  Careful planning over several years can avoid this trap.

When used in retirement, savings bonds can be used to help cash flow and avoid dipping into retirement accounts.  A review of interest rates and yields and time to maturity will determine which bonds to cash in.  Bonds close to maturity and earning a lower interest rate may be more beneficial to cash in.  Your income and need for cash will help determine the best bond to choose. 

Savings bonds issued after 1989, or a series I bond, can be used for education expenses.  Expenses must be qualified expenses, such as tuition and required fees.  Room and board are not included.  Using savings bonds for education is a great way to avoid taxes.  Interest from bonds used for education expenses provides tax-free benefits. 

Savings bonds provide a great way to save and a great benefit when they mature — if planned correctly.  Remember: Review your savings bonds and make a list of maturity dates. Be prepared to cash them in and plan so that they are not all cashed in the same year.  This will limit your tax liability.

Dennis K. O’Brien provides insight into how he uses email communications to keep in touch with clients, particularly during a challenging economic and financial environment.

The article “5 Ways to Improve Your Email Lists” appeared in B to B, A Crain’s Publication for business marketing professionals. 

 http://www.btobonline.com/apps/pbcs.dll/article?AID=/20090209/FREE/904019985

We are settling in for what will probably be the longest recession we have ever experienced. Unemployment may approach 10 percent by the end of this year.  Mortgage analysts are anticipating nearly eight million homes to enter foreclosure over the next four years.  The number of underwater home mortgages is already over 7.5 million. 

Many companies have reduced or cancelled the matching benefit for their 401k plans. 

 Sound like doomsday?  It’s not. 

It’s easy to forget the other major financial disasters we’ve encountered: The savings and loan crisis that led to the closing of more than 1,000 institutions. The debted economies of Southeast Asia. Russia’s default on debt. The collapse of the hedge fund Long Term Capital Management. Enron.  This is just in the past 30 years. 

In every decade there is a financial calamity.  Sometimes they happen in back-to-back years. Sometimes they happen in one country – and sometimes in several.  Ultimately we have made it through, and have moved on.  

The financial problems of today will be just a blip of a memory in five years. But in the near term, we can’t rely on a stimulus package from the government to heal. Instead, there are things that we can do ourselves today to help us make it through the tough times.  Reducing our expenses now to make up for a lost pay raise or an unexpected layoff is important to make it through the day-to-day bill juggling. 

So here are six things you can do now to help your pocketbook and keep your money in tough times:

• Develop cooking skills.  It’s healthier — and your kids can help and learn a life skill.  It also reduces the expense of dining out. 
• Cut your cable bill.  There are many channels and packages to choose from.  Many of the pay channels show repeats that are on basic rate channels.  Why pay for them?  Renting a movie is even cheaper and you get to watch what you want.  Better yet, gather the family together and play a game. 
• Cut your cell phone bill.  Review your bills.  If you regularly go over your minute allotment, change your plan.  Maybe your children don’t really need a phone at $10/month. Canceling the extra phones can save $120 a year.  Review the extra services that may not be necessary.
• Pay down debt.  The government wants you to spend to keep the economy going.  It’s not your responsibility to do so.  Your responsibility remains within your household.  If you have credit card debt and car loans, now is the time to make bigger payments to pay them down. 
• Rebuild your 401k.  This is a great time to rebuild your savings.  Don’t be scared off by the market conditions.  With the stock market down, your income and dividends will be reinvested at lower prices. In essence, equities are on sale.  This provides larger growth to occur over time. Get some help from a professional to give you more comfort with your nest egg.
• Cancel satellite radio.  Commercial-free satellite radio is questionable as it stands.  Most of their sales come from new cars.  Few new cars are selling.  Sirius XM is already burdened with debt and they have just increased their fees.  Cancelling this service can save a bundle.

Making these changes now, and reviewing other expenses, will help you in the long run and will give you some peace of mind. 

Take care of your household.  Turn off the news.  All in all, we will get through this.

Dennis K. O’Brien offers insights and tips in a story that examine how individuals can successfully store financial files digitally. 

The article appeared on www.bankrate.com as 5 Digital Ways to Store Money Documents.

http://www.bankrate.com/nydn/news/pf/20081125_digital_document_storage_a2.asp

Dennis K. O’Brien Offers Some Advice to Plan Sponsors of Retirement Programs such as 401ks as They Navigate Today’s Volatile Markets.