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Month: May 2016

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Memorial Day: Hero

Memorial Day: Hero

When someone says the word “hero,” what do you think of?  Do you imagine some muscle-laden dragon-slayer with a magical sword?  Or perhaps a gun-toting, leather-wearing action star, complete with signature sunglasses?  These are what heroes tend to look like in the movies, after all.

In real life, heroes come in all shapes and sizes, from all walks of life.  Perhaps it’s a tall, gawky young man with enormous ears.  Or a balding, middle-aged man with two bum ankles.  Or an old man with glasses and a hearing aid, leaning wearily on a cane.

That’s exactly what one legendary group of heroes looked like.  We’re referring, of course, to the Doolittle Raiders.

***

The year was 1942.  With the United States still reeling from the attack on Pearl Harbor, a group of officers decided something had to be done.

“The Japanese people had been told they were invulnerable … [but] an attack on the Japanese homeland would cause confusion and sow doubt about the reliability of their leaders.” 

So said Lieutenant Colonel James “Jimmy” Doolittle, describing the impetus behind one of the most notable feats of bravery ever performed when eighty members of the United States Air Force launched a daring air raid on Tokyo despite the overwhelming odds against them.

The need to take the fight to Japan was undeniable.  But according to Doolittle, there was another, more important reason for the raid:

There was a second and equally important psychological reason for the attack.  Americans badly needed a morale boost. 

In February of that year, members of the United States 17th Bomb Group were given the opportunity to volunteer for a secret mission.  They were not told what the mission was about or what its objective would be—only that it was both important and “extremely hazardous.”

Eighty men volunteered.  Eighty men raised their hands.  Despite the danger, despite not knowing what they were signing up for, eighty men said, “I’ll go.  Send me.”

In that moment, they became heroes.

Take a good look at them.  Some were young men barely out of their teens; others were decades older, with wives and children.  Some were tall and some were short.  They came from places like Fresno, California, and New Haven, Kentucky.  Each and every one a hero.

These were the Doolittle Raiders.

Fast forward to April 18, 1942.  The Raiders were still on their ships, almost 800 miles from Japan, when they were spotted by a Japanese boat.  The boat was quickly sunk, but not before it was able to radio a warning to the mainland.  The Raiders’ commander, Doolittle, was a 44-year old former air racer, who was already something of a legend in aeronautics for being the first pilot to ever take off, fly, and land using instruments alone (meaning he was essentially “flying blind”).  Now, he had to make a choice.  Continue as planned—or abort the mission?

Even though their secret was out, and even though they were 200 miles further out than they had planned, Doolittle decided to launch the attack.

Immediately, 16 planes took flight.  Each carried a pilot, co-pilot, navigator, bombardier, and a gunner.  Normally, such bombing raids had fighter escorts, but in this situation, the bombers were all alone.  They didn’t even have the kind of defenses most bombers normally had, because they had to remove as much weight from their planes as possible.  It was the only way they would make it all the way to Japan and back.

The Raiders reached Tokyo about six hours later.  Despite Tokyo’s defenses, not a single bomber was shot down.  They dropped their bombs and strafed their targets, giving Tokyo a taste of what Pearl Harbor had received.  More importantly, they had done what no one thought was possible: taken the war straight to the heart of Japan.

Then, things took a turn for the worse.

With night falling and the weather growing bleaker, the Raiders realized they did not have the fuel to reach their base in China.  Fifteen of the sixteen planes managed to reach the Chinese coast after 13 hours in the air.  Some of them crash-landed, others bailed out.  One plane was forced to fly all the way to the Soviet Union.  The crew was interned, and while they were treated well, it would be years before they made it home.

Many of the other Raiders were given help from the Chinese, but some weren’t so lucky.  Three airmen died while crash-landing.  Another eight were captured by the Japanese.  Three of these men were executed.  A fourth died in captivity.  They had given their lives so that their country would feel hope again.

The others were kept under confinement for four years, where they were starved, beaten, and sentenced to hard labor.  It wasn’t until 1945 that they were finally freed.

When Doolittle finally made it home, he expected to be court-martialed, as every single plane had been lost.  Instead, he returned to a hero’s welcome.  American morale had risen dramatically, just as Doolittle hoped it would.  Most of the surviving Raiders went on to serve in the rest of the war; some even served in Korea years later.

Ever since the war, the Doolittle Raiders have held an annual reunion.  Every decade, their number has dwindled.  As of this writing, only two are left.  They are old, now.  When you look at their pictures, you no longer see the same youth and vitality they once had.  But what you do see is far more important.

You still see heroes.

Every Memorial Day, we pay tribute to the thousands of heroes who died serving our country.  Some of these heroes died before the invention of photography.  Many of them are lost to history, their names unknown, their deeds unrecorded.

But we still know what they look like.  In fact, we know what all heroes look like.

Just imagine someone, anyone, young or old, short or tall, man or woman, raising a hand and saying, “I’ll go.  Send me.”

That’s what a hero looks like.

On behalf of everyone here at Minich MacGregor Wealth Management, we wish to say “Thank you” to our nation’s heroes.  Thank you for your service.  Thank you for your sacrifice.  Thank you for saying, “Send me.”

Thank you for being heroes.

 

P.S.  If you would like to learn more about the Doolittle Raiders, please visit http://www.doolittleraider.com/.

New DOL Fiduciary Rule – Butchers and Dieticians

New DOL Fiduciary Rule – Butchers and Dieticians

We were talking to a client last week and he asked about the new Department of Labor (“DOL”) Fiduciary Law he recently read.  We explained, in a nutshell, the new regulation requires all retirement plan advisors to put the best interest of the plan sponsor and the employees first.  To which he immediately asked, “Wait, you mean they didn’t already?”  The short answer is “It depends.”  (This is rarely the beginning of a short answer.)

Let’s start with the definition of a fiduciary. Investopedia defines it as follows:

A fiduciary is responsible for managing the assets of another person, or of a group of people. Asset managers, bankers, accountants, executors, board members, and corporate officers can all be considered fiduciaries when entrusted in good faith with the responsibility of managing another party’s assets.

Read more: Fiduciary Definition | Investopedia 

When acting in a fiduciary capacity, you are required by law to put the best interests of the party you are acting on behalf of before your own. One of the basic tenants of care when acting as a fiduciary is that you must eliminate or minimize conflicts of interest. It is both an ethical and legal position of trust with the highest legal standard of care.

401k advisors currently fit into one of two basic categories: Broker or Fiduciary Advisor

Today, many of the 401k professionals function in a sales capacity under a brokerage arrangement. Their compensation is in the form of commissions and varies from product to product.  In some cases, the compensation can be affected by the investment selections within the product.  A broker’s job is to sell a product that is within your means and meets your needs. The standard they must meet is called “suitability.”

A Fiduciary Advisor receives no compensation from the plan’s vendors and works on a revenue neutral basis – meaning they receive no differential in compensation based on product selection, this is commonly called a fee-based arrangement. A fiduciary’s focus is primarily on process rather than product. The process of vendor selection and monitoring must be well thought out and documented so that the plan sponsor can provide product(s) selected to meet the specific needs of the plan and its participants on an ongoing basis.

Butchers and Dieticians 

Full disclosure on this analogy – we like butchers and we like dieticians, but for different reasons. Think of it this way…if we go to the local butcher shop, their job is to sell us the meat they have in their store. The meat is most certainly regulated by the US Food and Drug  Administration (“FDA”); however, the FDA does not require the butcher to disclose that the same meat is on sale at Price Chopper, nor do they have to reveal that Hannaford may have a better quality burger.  We don’t expect the butcher to do this either.  Additionally, unbeknownst to us, the butcher may have an incentive from the manufacturer to sell more of a certain meat this month.  We would never expect them to tell us to “lay off the red meat and opt for the grilled veggies at the farmer’s market.” That’s not their job and it’s not what they get paid for.

Conversely, if we go to the doctor or a dietician, their job is to look at all the facts and recommend a diet which is in our best interest to keep us healthy. That’s why we go to them. They don’t receive an incentive from the local grocery store for promoting fruits and vegetables. We pay our bill for the office visit or consultation, but the amount we pay is not impacted by the food recommendations they make.

While the brokerage world is more like the butcher, fiduciary advisors are more are like the dieticians. The advisor’s compensation is not based on the product that is used, rather it is based on the advice and services they provide. This idea is not new in any way.  In fact, firms like ours have operated this way for years.

Holding all advisors to a higher standard

With the passing of the new regulation by the DOL, all 401k professionals will have to meet the fiduciary standard. The broker / salesperson role will no longer be an option. Moreover, the criteria to determine whether or not they are acting as a fiduciary has been broadened significantly.

So, back to our client’s question. No – professionals operating in a sales capacity under a brokerage arrangement are not currently required to put your best interest first – at least until the new law is fully inforce by January of 2018.

So how can you tell if the product you have today is in the best interest of you and your employees?

There is a basic scientific axiom that says in order to improve or manage something, you must be able to measure it. It is a fiduciary best practice to have your plan benchmarked against plans similar to yours on a regular basis by a third party. This benchmark also gives you the ability to gauge the health of your plan and identify any shortfalls that need to be shored up.  An independent benchmark analysis should include at a minimum: a comparison of all of the fees you are paying, an analysis of the investment lineup, and a review of your plan features and plan design. More advanced benchmark analyses will include an evaluation of how your employees are utilizing the plan, including participation and deferral rates and average investment allocations based on age.

So will the new regulation affect me?

You might be asking how, when, or if this new law will specifically affect your plan since it really is directly talking about the advisors and not the plans themselves. The retirement plan industry has changed fairly significantly over the past several years. For example, because of another DOL ruling a few years back, fees are now more transparent than they once were and fees on new plans have been dropping as a result. We expect over time with this new ruling we will see more fee compression and even more transparency – we see this as a very positive step for the industry, plan sponsors and participants.

For plan sponsors, possibly one of the most powerful effects of this new regulation is simply an increased awareness that they are ultimately responsible, under the highest standard of care, to make sure their plan is in the best interested of their employees. Moreover, simply relying on their current service providers may not be enough to ensure that.

Additional resources on Investopedia:

Suitability vs. Fiduciary: http://www.investopedia.com/articles/professionaleducation/11/suitability-fiduciary-standards.asp

 

 

 

 

 

 

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401k: You’re retired. Now what?

401k: You’re retired.  Now what? 

For years, you’ve saved, invested, and planned for the day you could enjoy a long, stable, dream-filled retirement.  But when it’s actually time to retire, you’ll be confronted with a basic but extremely important question:

“Now that I’m retired, what should I actually do with my retirement savings?”

The question may be basic, but the answer isn’t necessarily simple.  The fact of the matter is that you have a lot of options and a lot of choices to make.  If you want to make your savings last as long as you do, it’s critical that you choose the right option.

This letter is the first in a series that we’re calling, “I’m retired.  Now what?”  In each letter, we’ll look at some of the issues that face the newly-retired.

In this letter, we’re going to talk about a very important decision many retirees have to make:

What to do with your 401(k) once you’re retired.

For many people, a 401(k) is the easiest and most convenient way to save for retirement.  According to one study, nearly 80% of full-time workers have access to an employer-sponsored retirement plan such as a 401(k), and of these, more than 80% participate in their plan.1  It’s clear your 401(k) is an invaluable tool when it comes to saving for retirement.

But look ahead to the day that you’re actually retired.  What do you do with your 401(k) now?  Generally speaking, you have four basic options:

  1. Leave the assets in your 401(k) where they are (in your old employer’s plan if plan allows).
  2. Withdraw the funds out of your 401(k). From there you can stick them in a savings account at your local bank, invest them in individual securities (like stocks and bonds), or even take it all to Vegas for a very fun weekend. (Note: We do not recommend this.)
  3. Roll over the money in your 401(k) to an IRA or Roth IRA.
  4. Move assets into a new employer’s plan, if plan allows. (In case you still want to work after retirement.)

Most likely you will not be using option four since you are retired, so let’s look at each of the other three options in a little more detail.

Leave the assets where they are.

Some employers will allow you to leave the money in your 401(k) where it is even after you retire.  There are some obvious benefits to this.  For example, you may really like the investment options in your 401(k), or you may have a lot of faith in the person or company managing your 401(k).  If so, leaving the money where it is—at least temporarily—can make a lot of sense.

However, you’ll no longer be able to make contributions to your 401(k).  Also, you will likely have fewer investment options than you will with an IRA.  Finally, withdrawing money from your 401(k) can be tricky, as there are many rules and potential penalties to contend with.

Withdraw all the funds out of your 401(k).

You can think of this as essentially “cashing out.”  This option certainly gives you the greatest control over your money.  Unfortunately, there are many pitfalls to this approach.  Depending on your age and tax situation, you may find your money is subject to both ordinary income taxes and early withdrawal penalties.  Also, converting your 401(k) assets to cash means potentially exposing your retirement savings to emotional decisions and bad investment choices.

Roll the assets into an IRA.

This is probably the most popular option, and for good reason.  Rolling your assets into an IRA allows you to continue investing your money and keep it tax-deferred.  (That means you don’t have to pay taxes until you make a withdrawal.)  Also, IRAs often come with a far greater selection of investment options, which is important as your needs and goals change.  Finally, you can continue contributing money to your IRA account for as long as you want.  Keep in mind, however, that with an IRA, you must start making withdrawals (called “minimum required distributions”) once you reach age 70½.  Otherwise you will be subject to a penalty equal to 50% of the amount you were supposed to have withdrawn.  This is the government’s way of ensuring you actually use your savings for retirement.

So what’s the right option for you? That’s a question we would be happy to help you answer.  Everyone’s situation is different, which is why we never give blanket advice.  Instead, we recommend that we take some time to sit down together to review both your current situation and future goals.  That way, we can ensure you choose the best option for your individual needs.

In the meantime, remember: it’s critical that you make the right decision when it comes to the funds in your 401(k).  Don’t wait until the last minute to decide.  Give us a call at Minich MacGregor Wealth Management to start planning today!

 

1 “401(k) fast facts,” American Benefits Council, http://www.americanbenefitscouncil.org/documents2013/401k_stats.pdf

 

P.S.  Not retired yet?  Have you changed jobs and left your 401(k) behind?  Many of the above options may be applicable, call us to see what makes sense for you.

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Put your 401k to work

Put your 401k to work

With pensions on the decline, it is common for a 401(k) account to be a person’s largest retirement investment.  For many plan participants, the investment elections in the 401(k) account are largely ignored.  Often times, we see the same investment allocations that were made when the participant enrolled in the plan only now it’s 5, 10 or even 20 years later.  401(k) accounts are very important and the stakes are higher when they are the main source of retirement income.  More times than not, the investment decision-making responsibility falls on the shoulders of the participant…perhaps that’s you.

 

Participants have a range of portfolio management approaches – some use the “buy and hold” strategy while others opt to hire an advisor to actively manage the account.  “Buy and hold” involves someone selecting an asset allocation and holding it regardless of how the market performs.  This is a passive strategy that relies on time in the market rather than any tactical movements in the portfolio.  There is no inherent risk management being applied other than the philosophy of not having all your eggs in one basket.

 

The issue with any static allocation is of course choosing the right allocation.  This issue is compounded by the fact that the right mix for a particular investor may not be the same today as is it will be in a week, a year or even 5 years for a variety of factors. It’s like shooting at a moving target. Several years ago, many plans began offering a new type of investment called Target Date Funds. These funds allow investors to choose a single fund with an internal asset allocation that automatically adjusts over time based on the projected retirement date.  This alternative is for investors that do not want or feel they are unable to come up with an allocation of suitable investments and rebalance as needed.

 

Investopedia defines Target Date Funds as:

“A target-date fund is a mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement. Its returns are not guaranteed, but depend on how the market performs.”

 

Even though target date funds are not actively managed for risk, one may consider them to be a significant improvement over the passive “buy and hold” strategy.  Not only is the original allocation chosen for the participant, the allocation automatically rebalances so the percentages become more conservative as the investor approaches retirement.

 

Participants also have the option to employ the help of an advisor that can manage the account for them. Financial Engines & Aon Hewitt conducted a study which showed that participants who utilized help did significantly better than those that chose to go it on their own. The study, Help in Defined Contribution Plans: 2006 through 2012 examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers. It found that on average, employees using help had median annual returns that were 3.32 percent higher, net of fees, than participants managing their own portfolios.

 

Aside from participants simply not knowing that they can hire a professional to manage their 401(k) account, there are a few common hurdles that keep people from using an advisor:

  1. Some people mistake education for advice but there is a not-so-subtle difference between the two. Many 401(k) plans have advisors that provide some level of education for the plan participants.  However, when asked for specific advice by a participant, the advisor may not be willing or able to render advice to the individual participant because he or she is working for the plan sponsor – or the employer.
  2. The participant may not have the ability to have the cost of advisory services deducted directly from the account.
  3. Many participants have relationships with investment professionals that assists them with personal investments other than the 401(k) account.  Depending on the structure of the investment firm, they may be precluded from advising on accounts that are held away from the firm.  A 401(k) plan would be considered to be “held away”.

 

At the end of the day, the most important thing a 401(k) participant should do is pay attention to the account.  If you’re not going to do it yourself, perhaps you should find a professional that can do it for you.  Either way, it is up to you to make sure that you put your 401(k) to work for you.

 

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Three Financial Principles Our Mothers Taught Us

It’s May, and that means Mother’s Day!  As you know, Mother’s Day is a chance to tell our Moms how much we love and appreciate them.  A chance to say “thanks” for keeping us clothed and fed, safe and warm.

Yes, mothers sure do a lot, don’t they?  But did you know that most mothers play a huge role in our finances, too?

It’s not a role we talk about very often—and it’s certainly not a role they get a lot of credit for.  But when you think about it, mothers are hugely important in shaping a child’s financial future.  That’s because they’re often the first people to teach us good habits and important principles—principles that remain with us for the rest of our lives.

So in honor of Mother’s Day, we would like to pay tribute to:

Three Financial Principles Our Mothers Taught Us

  1. Don’t waste your money on impulse purchases!

Do you remember when your mom used to drag you along to the grocery store when you were a kid?  Do you remember standing in the checkout aisle, begging for one of the candy bars on display?  After all, it seemed the least your mom could do given the fact she made you come all the way to the store with her!

But inevitably, your mom said “No, that’s not what we came here for.”  And that was that.

This may have been frustrating at the time, but your mom was actually doing you a tremendous favor: she was teaching you not to make impulse purchases.

Most of us earn money for three reasons: to pay for our basic needs (like food, shelter, clothes, etc.), to pay for goods or services we find enjoyable, or to save for a future goal or dream.  But impulse purchases, whether they’re as harmless as buying a candy bar, or as significant as getting that new electronic gadget everyone’s talking about, can be an enormous drain on your finances.  While it’s true that whatever you decide might be enjoyable, that pleasure tends to dissipate fairly quickly.

So when your mom said, “That’s not what we’re here for,” she was actually giving you a great bit of advice!  One of the best ways to grow your money and afford the things you truly want (as opposed to what you merely want right now) is to remember “what you’re really here for.”

  1. The importance of saving and investing

Remember that summer when you decided to open up a lemonade stand outside your front house?  Chances are, your mom paid for the lemons, cups, and whatever else you needed.  But she also did more than that.  Imagine showing your mom all the money you earned—all those quarters, dimes, and the odd dollar bill.  Instead of letting you blow it all on bubblegum or trading cards, she probably told you to stick some of it in your piggy bank.  “After all,” she’d say, “if you save up enough money, you’ll be able to buy that 10-speed bike you keep talking about.”

In other words, your mom taught you the importance of saving.

In fact, chances are she did more than that.  “You know,” she’d probably say, “if you take some of the money you earned, you could use it to buy better lemons.  Or you could use it to buy the materials you need to make advertising signs and flyers.”  Soon, you were attracting more customers, selling more lemonade, and making more money.

So in a sense, your mom taught you the importance of investing.

Fast forward to today.  Saving and investing are a big part of reaching your financial goals, aren’t they?  So whenever you check off another item on your personal bucket list, make sure to thank your mom.

  1. The basics of financial planning

When you were a kid, you probably saw your mom take the time to balance the checkbook or hang a “to do” list on the refrigerator.  You probably didn’t think much of it at the time, but your mom was demonstrating the basics of financial planning.

Financial planning is the process of determining what you want, what you need, and what you must to do to acquire both.  It’s that simple.  And that’s what your mom did every day, every week, every month.  She devoted so much of her time and energy into determining what the family wanted (a vacation to Disneyland, presents under the Christmas tree), needed (new clothes for the kids, food in the refrigerator, college tuition), and how much she’d have to earn, save, (and when times were lean, maybe even scrimp) to get the family both.  All throughout your childhood, your mom never stopped planning for the future.

And that’s why you never stop planning, either.

So this Mother’s Day, let’s make sure we all take the time to tell our moms “thanks.”  Thanks for always being there.  Thanks for every headache, heartache, and sacrifice on our behalf.  Most of all, thanks for every lesson—about money, life, and everything.

Remember: our moms have always invested in us.  Let’s make Mother’s Day one small return on that investment.

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a Happy Mother’s Day!