Ameriprise Financial | The Chicago Financial Planner

4 Signs of a Lousy 401(k) Plan

February 6, 2013 By Roger Wohlner 20 Comments

Much has been written about the sorry state of retirement readiness in the United States. In fact the most frequently asked question that I get is Can I Retire?

For better or worse, the primary responsibility for accumulating sufficient assets for retirement has been placed upon our shoulders in the form of defined contribution retirement plans such as the 401(k), 403(b), etc. The defined benefit pension plans of our parent’s generation are rapidly fading away.

It is important that you make the most of any workplace retirement plan available to you. New required disclosures about the costs of the plan and the underlying investments were introduced in 2012 and are a good start. However, 401(k) plans are still a mystery to many of the workers who participate in them and sadly to many of the employers sponsoring these plans. Here are 4 signs that your 401(k) plan might be lousy.

Proprietary Funds

By this I mean your 401(k) plan provider or a brokerage firm affiliated with the plan offering their own mutual funds. The most extreme recent example of this is Ameriprise Financial who is being sued by a group of current and former employees for allegedly stuffing the plan offered to company employees with poor performing, high cost funds offered by Ameriprise. To boot they are also accused of taking revenue sharing payments from these funds.

While most examples are not this egregious, it should be a red flag if your plan is stuffed with funds or annuity sub-accounts from the likes of John Hancock or Principal and they also happen to be the provider of your retirement plan. There are often many incentives to be had by servicing brokers and other service providers to offer this type of line-up. While they are making money off of this type of plan, such an arrangement might be costing you big-time.

Single Fund Family Line-ups

For years the broker/registered rep community would offer a line-up filled with funds from the American Funds. These were often the best funds that they could sell and they rightly had a good name.

Just as bad is a line-up dominated by Vanguard or T. Rowe Price funds, or any other single fund family for that matter. Even though I highly respect both companies, no single fund family offers the best option in every asset class.

Expensive share classes

In many cases mutual fund companies offer a variety of share classes for use by various financial advisor channels ranging from fee-only RIAs to brokers and reps seeking compensation from selling the funds. In many cases the fund families offer several retirement plan share classes as well, again with some offering compensation to the advisor directly or to the retirement plan.

Check out the funds offered in your plan via Morningstar or elsewhere to see if there are less expensive share classes of your fund that are available. This even extends to low cost index fund providers like Vanguard who offer share classes which carry a lower expense ratio that the basic Investor share class.

A group annuity plan

This was the traditional fare for plans offered by insurance company providers. They are still around but if your employer’s plan is still in this format it is likely small in size or it has been in a group annuity for awhile.

A group annuity plan generally offers either mutual funds or annuity sub-accounts that are “wrapped” into a group annuity. These are complicated and generally expensive insurance contracts that often don’t bestow any particular benefit on the plan participants. In fact some plans carry surrender charges that make it difficult for employers to change providers.

What do I do if my 401(k) plan is lousy?

If there is a company match it often makes sense to contribute enough to receive the full match. This is free money you shouldn’t leave it on the table.
Do your homework and say something to those in charge of administering the company’s plan. This may or may not result in things changing, but many employers are more sensitive to this type of input in light of the current trends toward more disclosure and transparency.
If your plan offers a self-directed brokerage window check this option out. Understand the costs and any limitations involved. Also make sure that you are comfortable choosing your own investments or that you have an advisor to assist you.
Focus on retirement savings vehicles available outside of your plan including an IRA, maxing out a spouse’s retirement plan (if it’s better than yours), investing in a taxable account, or a low-cost annuity (ideally one with no surrender fees).
Make sure not to leave your money in this plan when you leave the company, roll it over to an IRA or to a new employer’s plan.

We are increasingly responsible for our own retirement savings. It is important that you understand how to best utilize the retirement plan offered by your employer. A good plan can be an invaluable tool in reaching your retirement savings goals. A lousy, expensive plan can cost you $1,000s in lost retirement savings and might be the difference between retiring in style or settling for less in your Golden Years.

Please feel free to contact me with your retirement planning and investing questions.

Retirement plan sponsors, do you need an independent review of your company’s plan? Do you need help selecting a new plan provider? Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees? Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) plan options and to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Update 2/27/13: It has come to my attention that a Tom Gonnella from Lincoln Trust Company has seen fit to use this post in an email to 401(k) advisors promoting their 401(k) platform. While I am flattered on the one hand, please know this was done without my knowledge or consent. I in no way, shape, or form endorse Lincoln Trust Company or its products. I will leave it to you the reader to judge the ethics of Mr. Gonnella and/or his employer in this matter. - Roger Wohlner

Photo Credit: Flickr

Filed Under: 401(k) Tagged With: 401(k), American Funds, Ameriprise Financial, Index fund, Mutual fund, Pension, retirement

3 Financial Products to Consider Avoiding

January 14, 2013 By Roger Wohlner 26 Comments

It’s a New Year and many of us are looking to start the New Year out on the right foot financially. Couple this with the upcoming tax season and this is prime time for the financial product sales types. Before buying ANY financial product make sure that this product is right for you in terms of your overall financial situation. Financial products are tools and just like your projects around the house you should use the right tool for the job and not the tool that the financial rep wants to sell to you.

Here are three products that you should consider avoiding:

Equity-Indexed Annuities

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500. Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss. As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today. Two problems here are generally high expenses and surrender charges that keep you locked in the product for years. The reality based upon my experience is that while most investors suffered major losses during 2008-09, my clients (and the clients of other financial advisors with whom I network) had generally made up those losses in a relatively short period of time and now find themselves decently ahead of where they were. I’m not sure that an expense laden Equity-Index Annuity would have made them any better off. If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including index participation, expenses, surrender charges, and the health of the underlying insurance company.

Proprietary Mutual Funds

It is not uncommon for registered reps and brokers, who are compensated all or in part by commissions or trailing fees from the mutual funds they sell, to suggest mutual funds from the family run by their employer. While some of these funds are perfectly fine, all too often in my experience they are not. Whether from high fees and/or low performance these are often investments to be avoided. A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleges the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and these funds then paid fees back to Ameriprise and some of its subsidiaries. JP Morgan settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

While this is most common in the world of fee-based and commissioned reps, if you are working with the advisory units of a fund company such as Fidelity or Vanguard you should also question recommendations that are exclusively or mainly into their own proprietary funds. Though I like and use funds from both families you should still question these types of recommendations. Moreover anyone who pushes you to invest mainly with mutual funds offered by their employer should be questioned vigorously.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes. In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers. A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more. B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio. This can amount to an addition 0.75% or more added to the fund’s annual expenses. In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period. B shares have been largely phased out by many of the major fund providers. C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

Look I certainly don’t provide financial advice for free and wouldn’t expect any other professional to do so either. Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go. My very biased opinion is that you should look for a fee-only advisor who isn’t compensated based upon the products they sell to you. Rather fee-only advisors generally act as fiduciaries and are paid for their professional advice and expertise without the conflicts of interest inherent in selling financial products.

The above comments are general and reflect my opinions. However no financial product is right or wrong in every case. Before making any financial or investment decision it is best to review your specific situation. Consult your financial advisor if you work with one.

Please feel free to contact me with questions about any financial products you may be considering or to address your investment and financial planning advice needs.

Do-it-yourselfers check out morningstar.com to analyze your investments and to get a free trial for their premium services. Check out Personal Capital for a variety of online services including expense tracking, financial planning capabilities, and investment monitoring.

Photo credit: Flickr

Filed Under: Investing Tagged With: Ameriprise Financial, Equity-indexed annuity, fee-only, Fidelity, Fiduciary, Investing, Mutual fund, Vanguard

Should You Buy Financial Services From Tommy Lee Jones?

November 14, 2012 By Roger Wohlner 4 Comments

I recently noticed the return of Tommy Lee Jones as the TV pitchman for Ameriprise Financial. Tommy Lee Jones is one

of my favorite actors, loved him in the Men in Black movies as well as other such as the Fugitive and No Country for Old Men.

Jones comes across as credible and trustworthy. His closing line “Together for your future” is masterful and powerful. As I’ve written here and elsewhere in the past, I’m not a fan of celebrity pitchmen for financial services and financial products. Case in point was a post about Mike Ditka hawking equity index annuity products.

At the end of the day advertising is about building awareness. I’m assuming and hoping that nobody reading this would actually contact Ameriprise or any other company and say “… sign me up…” based upon a celebrity endorsement. Rather this might prompt you to check out the company or product being advertised. Here are some basic questions to ask both yourself and a perspective advisor for starters:

Ask yourself this before Engaging a Financial Advisor

What issues are really bothering me?
- I’m worried about retirement.
- I want help managing my investments.
- I need answers to a specific financial question(s).
- I need a comprehensive review of my financial situation including a financial plan with actionable suggestions.
- Having an understanding of the areas in which you are seeking help is a key first step in selecting the right financial advisor.

Questions to Ask a Perspective Financial Advisor/Firm

What makes you qualified to provide me with advice?
Do you normally work with clients whose situation is similar to mine?
How will you determine the right course of action for me?
What areas of financial planning/financial advice are your specialties?
Will I be dealing with you or some lower level employee?

Questions Regarding an Advisor’s Compensation and Potential Conflicts of Interest

How will you be compensated if we work together? Are you willing to disclose all forms of compensation that you will receive?
Are there any conflicts of interest such as restrictions from your firm or the manner in which you are compensated that would impact the financial products that you might recommend to me?
Are you compensated via commissions; fees (Fee-Only); or a combination of the two (Fee-Based)?

Choosing the right financial advisor for you and your family is critical. You want to do your best to find someone who is competent, whose compensation method is made clear and is transparent, and who you feel that you can trust. Don’t be afraid to ask direct pointed questions and don’t settle for half-answers.

Please feel free to contact me with your financial planning and investment questions.

Photo credit: Wikipedia

Filed Under: Financial Advisors Tagged With: Ameriprise Financial, Financial Planning, Investing, Mike Ditka, Tommy Lee Jones