Smart401k Blog

You hear the term thrown around in the media a lot, but I haven’t seen many take the time to explore what the word fiduciary means and who can be a fiduciary.  

If you are a business owner or individual that makes decisions for your company’s retirement plan, you are a fiduciary.   (more…)

I read as much as I possibly can and do my best to stay abreast of what’s going on in the industry. Recently, two press releases have caught my attention. The first was from Charles Schwab and focused on a survey of young adults and the second was from Rep. Robert Andrews of the First Congressional District of New Jersey, who is the head of the House Subcommittee on Health, Employment Labor and Pensions. What caught my attention was that both focused on the need and desire for advice. Specifically, advice for employees who are investing in an employer sponsored retirement plan such as a 401(k) or the federal government’s Thrift Savings Plan.

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Changes occur in 401(k) plans more than you might think.  When a change happens it is supposed to reflect the best interest of the participants in the plan.  There are several different types of changes that can be made, including: new share classes, elimination or addition of funds or switching to institutional funds.  If a change is planned, your employer will send you a notification well in advance with the information you’ll need to know regarding both what the change is and when it will occur.  Below, you’ll find a brief description of the changes mentioned above.

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The recent economic downturn has forced many companies to consider making spending cuts and as a result a growing number of firms have decided to suspend their retirement plan matching contributions. Since this is a growing trend, I thought I would take the time to go over what you can do if your company has or is in the process of suspending their matching contribution.

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The ongoing market turmoil has generated a number of questions from our clients regarding the safety of their account. I thought I would take the time to discuss various accounts and what kind of protection each offers.

FDIC

Bank deposits are insured through the FDIC. The Federal Deposit Insurance Corporation insures deposits in banks and thrift institutions for up to $100,000 per person, per insured bank. This covers savings accounts, checking accounts and certificate of deposits (CDs). There are several ways that allow customers to increase their protection beyond $100,000. Some of these include the following:

• Brokered CDs – A brokered CD is a certificate of deposit purchased through your brokerage firm that places the money with an issuing bank. Purchasing multiple CDs through your brokerage firm allows you to spread your money across several institutions capturing the full FDIC protection at each institution.
• Payable on Death accounts (POD) – POD accounts are bank deposit accounts that are set up with multiple beneficiaries. For each qualified beneficiary, the account holder’s FDIC coverage increases by $100,000. The beneficiary has no rights to the funds until the account holder passes. The only real drawback to a POD bank account is that you cannot name alternate beneficiaries on one account.
• Joint accounts – Deposit accounts owned by more than one person are insured up to $100,000 per account holder.
• Multiple institutions – Customers that open deposit accounts at more than one bank are eligible for full FDIC protection at each bank
• Individual Retirement Accounts (IRAs) that are invested in a certificate of deposit also fall under FDIC protection. However, CDs held in IRAs are insured up to $250,000.

Editors Note:  Since this blog was posted, the FDIC coverage limit has increased. Today the FDIC covers $250,000 per depositor, per insured bank.  To learn more, go to http://www.fdic.gov/deposit/Deposits/insured/basics.html

SIPC

Brokerage accounts are covered by the Securities Investor Protection Corporation. When a brokerage is closed due to bankruptcy or other financial difficulties and customer assets are missing, the SIPC steps in and, within certain limits, works to return customers’ cash, stock and other securities.

The SIPC covers up to a maximum of $500,000 including up to $100,000 for any cash claims.

For example: Investor John Doe has an account with Brokerage A that declares bankruptcy. John has $800,000 in his account prior to the bankruptcy with $125,000 of his balance in cash. SIPC would cover $500,000 with $275,000 in securities and $25,000 in cash not being covered.

Retirement Accounts

Retirement accounts, including 401(k)’s and variable annuities, are protected in the event of a bankruptcy through the use of trusts, a legal instrument that spells out the beneficiaries and what the money can be spent for, which are shielded from bankruptcy creditors should their account provider run into financial trouble.

I hope this clears up any questions you might have, but as always, feel free to contact us by email at info@smart401k.com  or by phone at 877.627.8401 if you’d like to discuss this topic or any others directly with an advisor.

Buck Wendel, Investment Advisor

P.S. As you know, a large part of our day is staying abreast of the market.  This includes learning more about what other money managers are thinking.  Below is a quote from a recent market overview written by Bob Doll, Chief Investment Officer of Equities, at BlackRock, a large asset manager.  This information is provided to show another perspective on the market and is not intended to be interpreted as advice or a forecast of the markets.

” The broad sell-off in equity markets that we saw two weeks ago and again yesterday are, in our opinion, signs of capitulation on the part of many investors. Risk tolerance has moved to extremely low levels and we have seen a large degree of high-volume selling. Over the short term, these tend to be signals that the market is due for a rally. Volatility measures also point to the possibility of some sort of short-term climb in equity prices. Yesterday, the VIX Index (a measure of stock market volatility) rose into the upper 40s, a place it has only been four other times in its history- during the Asian financial crisis of the late 1990s, the Long-Term Capital Management fallout, the 9/11 terrorist attacks and the WorldCom bankruptcy filing. Following those previous VIX spikes, the S&P 500® Index climbed an average of 7% one week later, 11% one month later and 15% three months later. This is admittedly an unscientific sample of only four events, but, combined with the other factors we mentioned, we do believe it signals a high probability of a market rally. ”

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