Monday, September
6 2010
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Monday, September
6 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2008 January 2008A - Pay Close Attention to So-Called "Default" Investments By Forte News Department One of
the provisions of the Pension Protection Act of 2006 was to allow companies to
automatically enroll their employees in their companies’ 401(k) plans, but it
wasn’t until last October that companies got guidance on the categories of
investments they had to choose for their workers’ contributions. The
decision contained a controversial provision. The Labor Department decided to
prohibit stable-value funds or guaranteed investment contracts (GICs) from the
choices, because many experts find them too conservative for younger investors. Instead,
companies can now offer balanced mutual funds among their QDIAs (Qualified
Default Investment Alternatives) as well as target and lifecycle funds.
Balanced funds create an assortment of investments that fit the group of
employees as a whole, while target or lifecycle funds contain specific mixtures
of investments targeted to an investor’s age or retirement date. What’s
also important to know is that employers won’t be liable for employees’ money
lost while invested in a QDIA, but they’ll be responsible for doing the due
diligence to select the investments, for monitoring the investments’
performance and for deciding whether to keep or jettison those investments. So does
that mean that you can comfortably rely on default investments for your entire
retirement strategy? No. Target
investments specifically have become very popular. Money has been gushing into
these funds, according to the Investment Company Institute. By yearend 2006,
this particular category of funds held $114.3 billion in assets, up from only
$12.3 billion in 2001. Why the demand? In part such funds have been positioned
as “no-brainer” investments for individuals without the time, inclination or
knowledge to choose investments for themselves. 401(k) plan architect Ted Benna
was quoted earlier this year as saying that within 5-10 years, more than 75
percent of 401(k) plan assets could be invested in target funds. A trained
financial expert such as a Certified Financial Planner™ professional can help
individuals meet specific goals in retirement that aren’t addressed by these
one-size-fits-all plans. For instance, some critics say life-expectancy issues
are not adequately addressed in target-date plans, and they definitely don’t
address scenarios in which you plan to work in retirement or spend your assets
in unconventional ways. Also, some critics offer that many people may underfund
such plans without realizing the correct amounts they should invest to meet
their goal. A planner’s job is to help advise individuals on an ongoing basis
about meeting such goals. That
said, how should you evaluate a target-date fund? Here are some questions you
should ask: Do you know how much money you’ll
need to retire? This
is one of the questions you should start with based on your age and the vision
of retirement you have. It is one thing to invest in a fund that promises
consistent growth until your retirement date, but what if you need more growth?
What if there are specific tax and spending issues that might interfere with
putting the right amount of money into such funds each year? This is why
individual advice makes sense. A mutual fund can’t ask you what your goals are,
nor can it make sure you’re investing enough. How did your employer select the
funds it’s offering? Obviously,
most employers want to make the right fund choices for employees, but just
because they’re offering target funds doesn’t mean they’re offering the right
target funds for you and your needs. Keep in mind that most fund choices
offered to companies are heavily marketed and might not be the cheapest or most
efficient investment choices out there. Always check the Morningstar rating of
any fund your 401(k) invests in. What if you leave your job and take
your 401(k) with you?
What happens to your targeted investment plan then? Obviously you’ll roll over
these assets into another tax-advantaged retirement plan, but what will happen
to your annual retirement savings strategy at that point? Always ask. What are you paying for a targeted
fund? Granted, the
investment choices are being made for you, but what are you paying for those
choices? Often, these funds are constructed based on a fund-of-funds structure
that layers a fee on top of the fees incurred by the individual funds. Always
understand the fee structure of any fund you invest in. January 2008 — This column is
produced by the Financial Planning Association, the membership organization for
the financial planning community, and is provided by David W. Henion, CPA, a
local member of FPA. | ||||||||||||||
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