Paul Ferraresi

The fees associated with 401k investments have been hidden as have the entities claiming those fees. New Labor Department regulations will break down and make transparent those fees for the employers and workers. Additionally, there is a requirement that benchmark performance be provided so you can judge how your investment is doing relative to an index.

The rules are in place and the implementation has been delayed from the original date in July 2011.

Here is a really “sick” survey. The AARP found that 70% of 401k investors think they do not pay any fees for their 401k plan. When people state the same to me I ask…Tell me how long would you work at your job if you were not getting paid your salary? For the 70% that claim there are no fees, you are saying to me… all the people in your company, the custodian as well as the advisors who prepare all the reports, do the investing and those who handle the phones do it for free? Duh! What a rude awakening people will get when these 401k fee reports come out. You see, the fees are taken from your account returns. If there are no returns then your account loses value as they extract the fees from your account value.

There are a few major fees associated with 401k plans: One for managing the specific investment (usually mutual funds, annuities, or ETFs). Second are fees for record keeping, plan administration; e.g., transferring money, providing education, customer service, and keeping the plan compliant with the government.

There is a third fee for actions taken by you, such as, a loan, hardship withdrawal or actions related to a divorce. So even if you do not have actions such as above, you will pay a portion of the fee for the action your coworker took. Ah yes, socialism at its greatest!

Oh, one other thing: Remember, the mutual funds you invest in may have an up-front load fee (commission), and all of them charge a management fee of 1-4% per year.

Those of you in small firms — fewer than 100 employees — well, the boss (owner) is paying for a lot of those annual fees. In my experience, many owners are getting fed up, closing out the 401k plans, and offering employees much safer non-qualified plans instead.

In 2013 those 401k’s that have ETFs in them will be under the same requirements to disclose all the fees.

Why not consider better alternatives to IRAs and 401k’s that allow your money to grow tax free. You can withdraw it at any time without any tax or penalty, and when you die, it transfers the income tax free.

Here are a few changes to your taxes in 2012:

Annual Gift Tax Exclusion – Remains at $13,000

Lifetime Exemption for Gift and Estates – Increases to $5,120,000
(This exemption is scheduled to drop on 1/1/13 to $1mm)

35% Bracket Starts at (for joint returns) – $388,350

Those in 15% Bracket – Pay $0 tax on dividends and capital gains
(married with taxable income of up to $70,700; single with income of up to $35,350)

AMT Exemption Drops in 2012
Single – From $48,450 To $33,750
Joint Ret. – From $74,450 To $45,000

Maximum Contribution to 401k – Increases to $17,000

Wages Subject to Social Security Tax – Increases to $110,100

Now, for the special bonus… Starting January 2013, the Bush extended tax cuts expire. There will be major rate increases for everyone and decreases in deductions! Enjoy this year and get your tax planning in place immediately.

Here is an excerpt from an article written by Gary Smith in Investment Advisor magazine, December 2011:

Imagine you’re given the choice of two different times to be a stock market investor. Let’s assume that the S&P 500 represents the stock market investment in this example.

On the day of your first choice, which we’ll call Option No. 1, the conditions are as follows:

• Over the previous 10 years, the S&P 500 has gained more than 350% and is up nearly 18% in the last year alone.
• The stock market is generally expected to continue to do quite well.
• The S&Ps P/E ratio is around 31.
• The prime rate, the interest rate charged to the most credit-worthy borrowers, is 9%.

The conditions for your second choice of when to invest, Option No. 2, are a bit different:

• The previous nine years have seen the S&P 500 cut in half, plunging more than 47% in just the last 12 months.
• Fear is rampant, and little hope is held out for the stock market.
• The S&Ps P/E ratio is around 24.
• The prime rate is 3.25%

When would you rather be an investor?

If you haven’t already guessed, the conditions described above are those that actually existed in our not-too-distant past.

Option No. 1 is March 24, 2000. The roaring bull market of the 1990s fed the euphoria of early 2000. Many investors became increasingly aggressive, abandoning more conservative investments like bonds in favor of high-flying “dot-com” darlings. For those who gave in to the temptation to chase the bull market higher, the timing couldn’t have been worse. If you chose Option No. 1 as your entry date, what you bought was the investment experience that led to the conditions described in Option No. 2. Over the next nine years, the S&P 500 fell from 1,527 to 683 — a 55% decline. March 2000 ushered in the stock market’s “Lost Decade,” culminating in the global financial crisis and market meltdown of 2008-2009.

Option No. 2 is March 6, 2009. The collapse in housing prices triggered a banking crisis, which spread to a global credit crisis. The world’s financial system teetered on the brink of an abyss. If you chose that day to plunk down your hard-earned cash, you ended up buying a market that would go up by more than 65% in just over 2-1/2 years. The S&P 500 bottomed at 666.

Where are we today?

Now that you have read a portion of Gary’s article, what is your take?

Step away from your “feelings.” What is the feeling in the air? Is there pessimism or optimism? What are the fundamentals in the stock market now? Keep in mind, “regression around the mean.” What have the markets done in the past five years; therefore, over the next five years it should do ??? !

Here are a few simple strategies to build your wealth:

• SPEND LESS THAN YOU EARN. You can’t make your money grow if you spend it all.
• LIST YOUR FINANCIAL PRIORITIES. Put your retirement at the top of the list.
• ESTABLISH AN EMERGENCY FUND. Low-risk, accessible cash will lessen the temptation to dip into retirement savings in an emergency.
• MAKE SAVINGS A HABIT. Even a little can add up, thanks to the power of compounding.
• PAY YOURSELF FIRST. Stock away at least 20% of your pay. Have the money automatically deposited so you’ll never miss it.
• CUT EXPENSES. It’s one of the fastest and best ways to make money. Clip coupons, buy second-hand on eBay, eat out less often. Funnel this “found money” into your investments.
• CREATE INCOME. Take a second job, rent out a room or downsize and invest the profits.
• INVEST REGULARLY. Use time and timing to get into the marketplace. If you don’t know how to invest, find out how! Go through training, read books, ask an expert and then apply your knowledge. Remember: Don’t work for money. Let money work for you.
• CREATE LONG-TERM WEALTH. Money in a savings account is safe, but inflation will erode its value. Stocks provide long-term growth.
• DIVERSIFY. The best way to balance your risk is with a portfolio that spreads your money out over a variety of financial instruments.
• REVIEW. Revisit your spending plan, savings and goals monthly to be sure you are on track.
• AVOID BAD DEBT. Don’t borrow for things such as vacations, clothing or furniture. Borrowing to remodel a home, on the other hand, may be good debt that can provide long-term financial benefits.
• BEWARE OF HIGH-INTEREST LOANS. Look at the total cost of repaying the principal and interest, not just the low monthly payment.
• GET OUT OF BAD DEBT. Otherwise, finance fees eat up principal that could be earning interest.
• HANDLE CREDIT CARDS WISELY. Keep only one or two cards. Transfer high-interest balances to zero-interest cards.
• PLAN TO RETIRE LATER. If you’re doing what you love, work is fun! You can work longer, work part-time or become a consultant.
• DELAY TAKING SOCIAL SECURITY. Benefits will be higher when you start.

In less than 11 months from now a new Congress will be elected. In addition, you may have the same or a new administration in the White House.

What will the economy be like? What will be the “mood” of Americans? Monetary policy has been used up, and only fiscal policy tools remain. A major fiscal tool is tax policy.

The present tax law is set to expire on December 31, 2012. Will politicians kick the can down the road again? Everyone knows that there are a few major changes that need to be done to have the U.S. economy thrust forward with dynamic vigor. One aspect that must be noted: Any tax policy change must be cemented in place for at least five years. Any prudent individual or business cannot do any worthwhile planning or changing behavior with any shorter time period.

Here are a few changes that will transpire when the extended “Bush tax cuts” expire. Remember, it was the largest tax cut in history when first implemented and got us out of the 911-tech stock implosion of 2000-2003. Consequently, if it is not extended…it will be the largest tax increase in history. Here are just a “FEW” of the changes:

• All tax rates basically go up around 5%. The 10% bracket is eliminated and will be at 15%.
• Dividend rates will go from the present 15% rate to your ordinary tax rates.
• Capital gains rates go from the present 15% rates to rates of 25%. (Gee, I wonder what this will do to your stock market investments? DUH!)
• Elimination of the tax credit for having children. (This will hurt the unwed parents and illegal immigrant parents.)
• The marriage penalty tax will go back into effect. (This will encourage married people to not stay married.)

Since it is obvious that you will be taxed more in every area of your life, doesn’t it make sense to develop a plan to place your monies into programs that will never be taxed? We are here to help at any time.

Come November 2012 it may be beneficial to heed the words of the former Mayor Daly of Chicago, “Vote early and vote often.”