Wednesday, December 30, 2009

Can 2010 be Better?

2010 will be the year of stabilization. A year where, if you have a job, you will probably still be working at the beginning of 2011 and if you are not, you may find employment; one where if you are prudent (and by that I mean not-so-conservative but cautious), you will find the equity markets still performing better (but not better than expected); one where we have learned lessons that should not be soon forgotten.

Read the full article from Paul Petillo, Managing Editor of Target 2025.com here.

Thursday, December 17, 2009

When the 401k is Not an Option

Some of us may be entering a new job that does not have a 401k or has one that you do not feel is as good as the one you just left. And your employer won't let you keep your money where it was. What to do?

Rolling your 401k into an IRA is another matter. This is for the investor who has some concept of what lies before them. If I were to guess, this type of investor has had an active roll in how their former employer's 401k was allocated. They paid close attention to diversity, perhaps even following conventional wisdom of limiting risk as they aged.

For this retirement investor, the IRA rollover is viable option. It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved.

IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. But the choices are the primary attraction. This investor knows, and you should as well, the risks of building a successful IRA portfolio also increase. The biggest concern is investments that crossover.

What 401k plans are supposed to do is provide the investor with a fiduciary responsibility to provide the right tools for their employees. You, as an IRA investor are on your own.

You must monitor the funds you invested in for a change in investment strategy, style drift (when a fund manager invests on the edges of what s/he was hired to do; such as when they invest in large-caps when mid-caps are the focus), and an increase in turnover (a cost for trading repeatedly that the shareholder pays for directly, often done in an attempt to boost returns in the short-term, like at the quarter's end). You bear the burden of this responsibility to your future.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Paul Petillo is the Managing Editor of Target2025.com

Wednesday, December 16, 2009

What to do with a 401k from an Old Job?

Some of us may be entering a new job that does not have a 401k or has one that you do not feel is as good as the one you just left. And your employer won't let you keep your money where it was. What to do?

Rolling your 401k into an IRA is different that moving it to a new employer's 401k. In fact, it is wholly another matter. Given the option, keep the money in a 401k. But some of you will want to venture forth on your own even if your employer has a plan in place you could have used.

This is for the investor who has some concept of what lies before them. If I were to guess, this type of investor has had an active roll in how their former employer's 401k was allocated. They paid close attention to diversity, perhaps even following conventional wisdom of limiting risk as they aged.

For this retirement investor, the IRA rollover is viable option. It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved.

IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. But the choices are the primary attraction. This investor knows, and you should as well, the risks of building a successful IRA portfolio also increase. The biggest concern is investments that crossover.

What 401k plans are supposed to do is provide the investor with a fiduciary responsibility to provide the right tools for their employees. You, as an IRA investor are on your own.

You must monitor the funds you invested in for a change in investment strategy, style drift (when a fund manager invests on the edges of what s/he was hired to do; such as when they invest in large-caps when mid-caps are the focus), and an increase in turnover (a cost for trading repeatedly that the shareholder pays for directly, often done in an attempt to boost returns in the short-term, like at the quarter's end). You bear the burden of this responsibility to your future.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Paul Petillo is the Managing Editor of Target2025.com

Tuesday, December 15, 2009

Job Separation Investing

Keeping the money in a 401k has its advantages. For older workers, the ability to begin disbursement at age 55 is an attractive plus. Although it is generally ill-advised under almost every circumstance, keeping the money in the 401k retains your ability to borrow from the plan. Some of us will consider keeping this option open. It's an option albeit, not a good one.

Generally, the fees are better in a 401k. Institutions may get a much better deal from the plan sponsor and consideration of this is important in the rollover decision. A much larger plan may come with more options or simply less expensive ones. Fees are an important aspect of total return and a worthwhile item to focus on when making any decision to move.

But you may not have an option if the balance is less than $5,000. This means you are faced with the choice of taking the cash in the account (along with the 20% the account must hold for income taxes and the 10% penalty). The scariest statistic, two-thirds of you take the money and pay those hefty penalties.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Next: rolling to an IRA.

Paul Petillo is the Managing Editor of Target2025.com

Friday, December 11, 2009

Dividends in Mutual Funds

We have been discussing dividends with Paul Petillo, a regular contributor on MomsMakingaMillion Radio for the last several weeks. As we continue or series, we have five questions:
Could you recap briefly for our listeners what we have already discussed?

Our discussion about dividends has offered a brief overview of what they are: profits paid back to the shareholder of record, and how you can buy them directly: through direct stock purchase of through dividend reinvestment plans or DRIPs. By far, the easiest way to take advantage of what these companies offer shareholders is to spread the risk and the time you might take looking for them by using mutual funds.

When we look at mutual funds that pay dividends, what are we looking for exactly?

This group of mutual funds is often referred to as 'equity income'. They are stocks that provide income and fund managers in this space are looking for good stocks selling for less than what they perceive which means they are hunting for value and stocks that pay a dividend. Keep in mind, this was much easier to do just a few short years ago.

Why is that?

There was a tax advantage to these types of funds and in the pre-bailout economy, many companies were increasing their dividends because of it. Since then, many companies, particularly those with a financial component (like GE and GM) or businesses focused on the financial sector (such as Citigroup) have either suspended or reduced their dividend in response to those changes in fortune. Currently, there are about 296 stocks that pay a dividend of some sort. In fact, holding an S&P 500 index fund will net you a dividend yield of about 2.5%. That 2.5% is what equity income funds use as the number to beat.

Are all dividend paying stocks the same?

Not at all. There is a term for it: dividend payout ratio. In the thirties, this ratio was about 90% - that's roughly ninety cents for every dollar made was given to shareholders. Now it is about 30% or less. This is a good rule of thumb for investors. If your stock is paying more than 30% of their profits back to shareholders, this might be a sign of trouble (if you consider that this percentage has gone up while the share price, a vote of investor confidence has gone down). If it is paying less the 30%, the company might be overvalued by the markets or simply in too much trouble to pay enough of the profits to shareholders.

Any last thoughts?

Keep in mind that dividends are backward looking, reflecting profits from the past year. If companies cut their dividends because profits were down, raising or reinstating them might not happen until next year. A lot of companies are going to buy back shares of their own businesses in large part because they are still cheap and because doing so, increases the price of the stock by making less shares available.

Look for companies that have been able to increase dividends over a long period of time (like McDonalds (dividend payout ratio: 52%), Pepsi (dividend payout ratio: 54%), Kimberly-Clark (dividend payout ratio: 55%) or a mutual fund that has beaten the S&P500 average payout of 2.5% (Columbia Dividend Income 2.47%, Nicholas Equity Income, yield 3.12%)

Paul Petillo is the Managing Editor of Target2025.com

Thursday, December 10, 2009

Retirement Planning: Where the Best 401k Plans Work

In a previous post, we introduced a rating system for your 401(k) offered by Brightscope. Now, they are offering a look at the best 401(k) plans.

Does your plan work as hard as you do?

The Top 30 401(k) plans as rated by Brightscope.

Paul Petillo is the Managing Editor of Target2025.com

Saturday, December 5, 2009

One the Edge of Losing Ground: Bankruptcy

The latest employment numbers are showing a slight increase in jobs. That's small comfort for the enormous group of folks who are still unemployed.

With over ten percent of us out of work, another eight percent of us no longer bothering and an estimated twenty percent of us contemplating the possibility that we might lose everything we have worked so hard for, the subject of who owns what as we consider our options in an economy that doesn't seem to be recovering fast enough to suit most of, the question of your 401(k) as part of a bankruptcy is worth asking.

The choice of bankruptcy is always the last option. When you consider this option, you will find your assets under the control of the bankruptcy estate while your case is pending. You still own these assets. Your home is protected providing you can make the payments and if your home is worth more than your mortgage, the bankruptcy estate will exclude up to $37,500 in equity from consideration. The same applies to any equity you might have in your car.

The concept for exempting these two items is relatively straightforward. How could you possibly hope to recover from bankruptcy if you were stripped of these items? Understanding the need for shelter and transportation is important. But does the most valuable asset protecting your future fall under the same consideration?

Although you will need a bankruptcy attorney to guide you through the maze of rules, the focus of such an action is to come to some sort of agreement with your creditors on how you will repay what you owe. In some instances, it might be the forgiveness of your interest obligation in favor of satisfying the debt. Repayments plans and schedules are worked out and as long as you follow those obligations, you can remain under the roof that you own and be able to get to and from work.

The question of your 401(k) however is not so clear-cut. And the answer depends on ERISA qualifications. Section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable law is enforceable in a case under the Bankruptcy Code.”

This means that your 401(k) is safe from the actions of bankruptcy court and cannot be considered when determining the value of the estate. If you plan falls under ERISA protection, and generally this qualification applies to most larger company plans, your assets are safe. The exception however, effects the smaller business owner.

Among the exceptions to this rule is a retirement plans that has only one participant, such as single employee corporate plans, and some other plans originating in self employment. These plans may be property of the estate. They may be vulnerable to creditors. When you consider the number of small businesses affected by the economic downturn, this is an important exemption.

For those of you who do have a plan that is exempt, the ownership of this property has found its way to the US Appeals Court. The question posed by the case dealt with the loan that was borrowed from a 401(k). Although the person was obligated to pay back the loan, the loan payment was questioned.

Chapter 7 bankruptcy subjects the estate in question to a means test. This sorts out what is qualified and what is not in terms of "necessary expenses". The loan repayment to the 401(k) was challenged. The court, ruling in the case of Egjebjerg v. Anderson found that the repayment to the 401(k) was the same as a contribution to that person's plan. In other words, if you loan money to yourself, the repayment of that loan is not considered a debt under the law.

The plan has not right to sue for repayment of the 401(k) loan but can, according to the court, offset the loan against future benefits. But the court that while Chapter 7 proceedings did not cover the individual, Chapter 13 would consider the repayment as part of the debt owed. This subtle difference is important and makes the consideration of good representation a must for anyone considering such a drastic move.

It is important to consider all of your options before subjecting your finances to estate scrutiny. And secondly, borrowing from your 401(k) is still a bad idea. In a Chapter 7 proceeding, the losses to that important linger far into the future. And while Chapter 13, often referred to as the wage-earners plan, does allow for the repayment of that loan under the court's approved structure, the loss of earnings in the retirement plan will have lingering effects long after you emerge, finances revitalized.

Paul Petillo is the Managing Editor of Target2025.com