How the DOL fiduciary rule transforms retirement management

This past spring, the Department of Labor (DOL) released a rule to address conflicts of interest when it comes to retirement advice, which will have far-reaching effects on the fiduciary landscape.

“It’s been in the works for years, and it wasn’t a surprise when it came out. The only surprise was that it was watered down, because there was a level of panic that was setting in over the past year. A lot of models haven’t adjusted,” says Daniel J. Dingus, president and executive director of portfolio management at Fragasso Financial Advisors.

Previously, advisers and brokers managed individual investor’s retirement accounts under different standards. Brokers followed a “suitability” standard for retirement accounts; they were required to offer a suitable product, not the best product.

Under the new rule, all money managers will be mandated to abide by a higher “fiduciary” standard, which means putting clients’ best interests before their own profits at all times. This attempts to keep brokers from steering investors to products where the broker receives a higher commission.

All fees, even commissions, will have to be disclosed, and a contract that states the adviser is acting in the client’s best interest will have to be submitted.

The rule is slated to go into effect April 10, 2017. There was an attempt to stop it, but Dingus believes it will go forward as planned.

Smart Business spoke with Dingus about the DOL fiduciary rule and the impact it will have on investors.

Do investors know the difference between a broker and an adviser?

The distinction has never been clear to the general public, which doesn’t really know who is what. It’s typically not based on credentials — but by how you act. However, investors are starting to ask about this, and as the rule gets closer to implementation it may open eyes even further.

Right now this only impacts retirement accounts, not personal accounts. The DOL was determined to rule on retirement accounts first, but at some point this may apply to all accounts.

How do you expect the fiduciary landscape to change?

Every day there are more advisers than brokers, and that trend will continue, as brokers go the way of the horse and buggy.

Firms that have always promoted brokerage products will have to learn what it takes to be a fiduciary. There’s a learning curve because they’ve never adhered to the true spirit of that standard — and been held liable to it. If you offer illiquid, proprietary or commission-based products and believe you’re acting in the client’s best interests, you will be hard pressed to prove that to a judge.

With firms taking on more risk — and they are definitely nervous about the legal consequences — there’s likely to be industry consolidation. That won’t just be with the brokers themselves but also with the providers. For example, Mass Mutual acquired part of MetLife earlier this year.

The rule will probably drive fees down a little bit, now that there’s a focus on fees, which is good for everybody. Because the brokerage world is going to be marginalized, mutual funds that have a litany of share classes will likely keep the cheaper ones, versus the more expensive ones.

What should investors be doing differently going forward?

You’ll need to ask yourself if you want to continue in a brokerage relationship, now that you understand the differences. However, for a minority of investors, brokerage products still make sense because of what’s available.

If investors aren’t being taken care of once the rule goes into effect, attorneys will certainly step in and educate people.

Business owners who sponsor retirement plans through their company also need to understand how the fiduciary responsibility works with their plan design, because, like individual investors, they typically don’t understand the difference between a broker and an adviser. If their provider or broker won’t take on the fiduciary responsibility, the trustee or board of directors is solely responsible. This is particularly important in the nonprofit sector, where they often spend their time on the foundation and endowment, ignoring the 401(k) plan.

Insights Wealth Management is brought to you by Fragasso Financial Advisors

How to find the right mix of assets in your investment portfolio

Diversification in your investment strategy is all about managing risk, says Brandon Strong, Managing Partner at Stonebridge Wealth Strategies.

“When you’re building a portfolio, you need to understand how each investment fits in with your overall goal,” Strong says. “You need to understand the correlation of different asset classes and how they diversify a portfolio. Diversification is about managing risk. It’s not a strategy to make more money.”

The complexities of diversification can easily lead investors to have a false sense of security about their wealth building strategy. The long-term effect of this disconnect is it becomes more difficult to meet long-term goals such as putting your kids through college, planning your retirement and passing on your wealth to your heirs.

“You have to pay attention to what you own as an investment, why you own it and how it all fits together,” Strong says.

Smart Business spoke with Strong about the best approach to diversifying your investment portfolio.

How does the use of multiple asset classes help you diversify your investment portfolio?
An asset class in its simplest form could be equity, or any stock that you might own. It could be fixed income, which could refer to an entire bond market. From there, you can break those two categories down even further.

For stocks, you can look at it in terms of international versus U.S. asset classes and then small, medium and large companies that you’re investing in. Each one of those asset classes reacts in its own way to different economic data.

When you blend them into a portfolio, you are often helping to address your overall risk because you have assets that react differently to what is happening in the economy. On the bond side, you could break it down to U.S. government bonds, corporate bonds, municipal bonds, foreign government bonds and a variety of other categories beyond these segments.

What people often forget to add to their portfolio is investment in asset classes outside of these categories. Real estate and commodities are two segments not highly correlated to those asset classes that could bring down the overall movement or volatility of your portfolio. As an investor, you need to regularly balance the level of risk in your portfolio.

There’s a big difference between saving money and putting it into an investment account versus when you get to retirement and you now need to distribute money out of the account. Your strategy can be driven by two philosophies: What’s your risk tolerance? What level of risk do you need to achieve your goal?

Where do people get into trouble trying to achieve investment diversity?
You might hold one brokerage account with 15 different mutual funds, but each one of those funds is fairly similar. Even though you’re diversified in the number of mutual funds, they all basically do the same thing, so you’re not diversified within that asset.

Conversely, it’s typically unwise to use one mutual fund or one money manager to fit into every different asset class. Another risk would be to have your entire net worth and future income tied up with one particular source, such as your employer through stock ownership and a pension plan.

Diversification is not as much about the assets you own as it is about how those assets fit together to help you meet your long-term wealth building goals.

What’s the key to having a good investment strategy?
You always start with a financial plan and make sure you know where you need to be at the end of your goal.

Do your homework and understand where you are in relation to your goal before you make any changes. Talk to a financial professional who can help you understand next steps and determine how environmental changes could affect your asset allocation or diversification strategy. ●

Financial Professionals of Stonebridge Wealth Strategies are registered representatives who offer securities products through AXA Advisors, LLC, a registered broker-dealer and member FINRA/SIPC, investment advisor representatives who offer financial planning and investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC. AXA Network conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC, in PR as AXA Network of Puerto Rico, Inc. Asset allocation, diversification and rebalancing do not guarantee a profit or protection against loss. Asset Allocation is a method of diversification which positions assets among major investment categories. This tool may be used in an effort to manage risk and enhance returns. AGE- 116266(06/160(Ext.06/18)

Insights Wealth Management is brought to you by AXA Advisors, LLC

A look at best practices for managing your company’s 401(k) plan

Companies that offer employees a 401(k) plan must recognize their responsibility to act in the best interests of those employees, says David C. Barth, AIF, a financial consultant at AXA Advisors, LLC.

“Regulators such as the IRS and the Department of Labor are not as concerned about whether you made a perfectly timed investment decision or have the absolute lowest cost plan for your employees,” Barth says. “It’s more about having a process that confirms you are satisfying your fiduciary duties, acting on behalf of your plan participants, and offering a menu of prudent investment choices at a cost that is reasonable for the services you’re receiving. Is there documentation that offers evidence that it’s not just a roll out the plan and forget it type of mentality?”

The challenge for many businesses, especially the smaller ones, is finding time to address these important fiduciary duties. Fortunately, there are professionals with experience with retirement plans who can provide support.

“You need a process in place to manage your plan and if you don’t have one, you should reach out to a qualified professional and figure out the steps to help ensure you’re doing the appropriate due diligence,” Barth says.

Smart Business spoke with Barth about best practices when it comes to managing your company’s 401(k) plan.

What is a fiduciary best practices approach?

The biggest part of this approach is forming a committee with multiple people inside the company who work with your 401(k) plan and make decisions that pertain to it. Typically, you’ll have the owner or president, a financial person such as the CFO, an HR representative and in some cases, a member who represents the rank-and-file employees to represent the other side of the organization. Consider hiring an outside advisor with fiduciary credentials who can help you through the process of forming the committee and managing your duties. Then it’s a matter of ensuring that the committee meets on a regular basis and documenting what is discussed at those meetings. Create and follow an investment policy statement that guides your company’s investment decisions. The goal is to create structure, regular dialogue and documentation around your 401(k) plan.

How does this process serve the best interests of individual 401(k) plan participants?

The committee needs to realize that it is making decisions on behalf of the masses and not on an individual basis. The goal is to structure an investment menu that provides aggressive investment options for the participant who wants to be more aggressive along with more conservative options for the conservative investor, as well as a vehicle to assist participants in making choices that are appropriate. It’s giving the participant population the ability to have quality choices in different categories so they can structure their plan to meet their own unique needs. Employers typically want to do right by their employees. But if they are lacking the right guidance from an outside fiduciary consultant, it may not be happening simply because they don’t know what they don’t know. If you develop and follow a process to review and monitor funds that is guided by a professional, you’ll have a diverse investment menu. You’ll have a mechanism in place to swap out an underperforming fund and possess the data you need to negotiate fee reductions from your service providers when appropriate, thereby reducing the fees for your participants.

How can you evaluate your plan advisor?

Work with somebody who spends a lot of time in the qualified plan world. If they are experienced specifically in retirement plans and fiduciary needs, that’s important. Make sure there is a through and regular review to evaluate the advisor team, what they do and who they service. Ideally, your advisor will help you work with your plan provider to better understand your participant demographics and target investment education in a way that enables your people to maximize the value of their investments, and, ultimately their retirement readiness.

This article is for informational purposes only and is not intended as legal or tax advice. David Barth offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers insurance and annuity products through AXA Network, LLC.  AGE 115601 (6/16)(Exp 6/18).

Insights Wealth Management is brought to you by AXA Advisors, LLC

 

How to secure your retirement plan in a volatile market

January of this year was the worst January for the stock market in the history of the market. Fortunately, February and March, for the most part, made up for those losses. But when the market is volatile, it can make investors nervous, especially those close to retirement, says Michael Fertig, AIF®, vice president at Fragasso Financial Advisors.

“There are a lot of pressures that are put on a certain group of pre-retirees today,” Fertig says. “Whether it’s paying for their children’s college education, kids moving back in or taking care of elderly parents — or some combination of all of those — it sometimes becomes almost impossible to fund your own retirement.”

Smart Business spoke with Fertig about retirement security during volatile markets.

What’s important to remember in times of volatile stock market change?

Investors need to be honest about their risk tolerance upfront, in order to elect a strategy that they can live with. That doesn’t mean you can’t adjust your strategy, but certainly one of the worst times to do so is in the midst of a volatile market.

You also need to work out a compromise with your spouse, if your risk tolerances are different. That might mean separate portfolios or finding a middle ground.

It’s a good idea to put together a worst-case scenario. Your adviser can go back to what your portfolio blend would have looked like in 2008. If it’s 70 percent stocks, 30 percent bonds, it might have been down 30 percent or X amount in terms of real dollars. What does that do to you? Do you lose sleep if you’re down that much? If yes, then you’ll want a slightly different mix.

Once you settle on a suitable asset allocation model to give you enough return to allow you to reach your goals with the amount of risk you’re willing to assume, the hardest piece is sticking with it. You can’t tear up the portfolio every time there’s a blip. When you look at events like Y2K, the tech bubble or 9/11, it always seems like this time it’s going to be a worse, longer and steeper decline. But every time the market has rebounded and come back stronger.

How can investors have retirement security, no matter what the market does?

Investors can’t always control their time horizon — a 20- or 30-year retirement is becoming the norm. In fact, of the babies born today, half are projected to live to 100 or older. The baby boomer generation is already starting to redefine what retirement looks like, with many working part time or doing consulting until they are 65 or 70.

Investors also can’t predict what the stock market will do.

What you do control are your savings. A lot of people don’t maximize the opportunities of their employer retirement plan. It’s also a good idea to increase your retirement savings every time you get a raise — get that money out of your paycheck before it gets into your hands.

Prior to retirement, you want to pay off as much debt as possible. Many pre-retirees borrow from their retirement plans to pay for college, especially if they didn’t start saving early enough. You may argue that if you borrow from your retirement plan, rather than having your kids take on student loans, at least you’re paying yourself back. That’s a legitimate, accurate and reasonable argument, but it doesn’t account for the time value of money. It will come down to personal preference, so have your adviser take you through what your retirement plan looks like in both scenarios. If you borrow from the plan, in most cases, it means having to redefine what your retirement looks like.

When you’re three to five years away from retirement, start getting serious about how much you’re going to need in terms of spending. Once you retire, it may change, so you’ll need to stay in regular touch with your adviser.

Also, decide how much of an emergency reserve you want to set aside that should never be invested — six months of living expenses, $5,000 or $10,000? If you keep several months of necessary distributions in cash, you’re not selling stock that’s already depressed and pouring salt into the wound.

One of the worst mistakes people can make is getting too conservative before they retire or as they enter retirement, because of how much life expectancies go up every year. That’s why, again, understanding your risk tolerance is critical.

Insights Wealth Management is brought to you by Fragasso Financial Advisors

Potential pitfalls and risks of saving and drawing on your retirement

Many people put off saving for retirement, thinking there’s just not enough money at the end of the month, or often focusing on current lifestyle.

“They tell themselves they’ll start putting something away for the future as soon as there’s extra,” says Chad Vavpetic, Regional Vice President at AXA Advisors, LLC.

“The problem is, it never gets easier. Demands on your money will always expand to consume your full income, if you allow it to happen.

“It’s common for young professionals starting out now to have tens of thousands of dollars in student loan debt. They often feel like, ‘Retirement is 40 years off, I can’t start thinking about that now. I have to pay off these loans, buy a car, get my own place.’ That’s a huge challenge. Time is everything when it comes to accruing sufficient retirement assets, and starting early is key, even if you start saving a relatively low percentage of your income initially.”

Smart Business spoke with Vavpetic about the common risks and pitfalls related to retirement planning.

What are some mistakes people make when projecting how much money they will need in retirement?

The first mistake for most is failing to understand that saving for retirement is no longer the responsibility of your employer or union through a defined-benefit pension plan. It often now falls completely on you. Many are not saving enough in defined contribution 401(k) or 403(b) plans to make up for the reduction or absence of that traditional pension.

Even those who are committed retirement savers may not be adequately prepared for two of the primary risks facing financial security in the golden years, inflation and longevity. While inflation has averaged 3.18 percent over the last century (inflationdata.com), many financial professionals believe that the fiscal policy the federal government has employed since 2008 will likely result in the devaluation of the dollar, growing the cost of living at a faster-than-normal rate in coming decades. That means more retirement dollars will be required just to maintain preretirement lifestyle, not to mention the added expense of traveling to visit the grandchildren or that winter home in Florida. Couple inflation risk with increased life expectancies, and the possibility of outliving retirement assets becomes a very real concern.

What about tax liability?

Tax liability is one of the biggest deterrents to accumulating retirement assets; you need a strategy that is conscious of that. Traditional pretax and Roth retirement contributions are very simple and powerful ways to save on a tax advantage basis. There are also more advanced strategies, often used when IRAs and employer-sponsored options are limited or have been phased out due to income level. Saving on a tax-advantaged basis is essential.

Tax liability is also a major concern at distribution time. For example, cashing in a big chunk of your retirement to pay off low-interest debt like a mortgage in lump-sum fashion could have big tax implications and may not be the most advantageous decision. As you transition into retirement, it’s more about cash flow than assets and liabilities. Having a sound distribution strategy is extremely important.

Is it possible to successfully plan your retirement on your own?

Retirement planning is no longer a do-it-yourself endeavor. Markets are as volatile as ever, as has been evident in recent weeks. Tax laws and regulations are more complicated than ever. Financial products are increasingly advanced, as the industry continues to innovate in response to the changing economic environment.

Somebody has to be knowledgeable of all of this. You can either become an expert, or work with someone who has that knowledge. The need for qualified professional advice has never been greater.

A good adviser can help you design a strategy that serves your individual goals and addresses your concerns, while seeking to both protect and maximize your retirement income.

Insights Wealth Management is brought to you by AXA Advisors, LLC

Chad Vavpetic offers securities through AXA Advisors, LLC (NY, NY, 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. 107310 (09/2017)

How to potentially increase the wealth you leave your heirs

People born in the 1930s and 1940s enjoyed the many benefits of a robust economy when they entered the workforce, says Mark C. Pagni, ChFC, CLU, a Financial Consultant at AXA Advisors, LLC.

“They enjoyed solid wages and cradle-to-grave, employer-paid benefits including pension plans and health insurance plans,” Pagni says. “They also enjoyed strong government benefits like Social Security, and Medicare, both programs that are likely going to be reduced or postponed to later ages, for our young children or grandchildren.”

Today, the economic climate has changed dramatically. Many company benefits are being trimmed or discontinued, and pensions are becoming more and more uncommon. In the midst of these changes, legacy planning might make a real difference in the quality of life that our survivors enjoy someday.

Smart Business spoke with Pagni about the value of legacy planning and how to potentially increase the wealth you leave your heirs.

Who should be looking at legacy planning?

Your first concern should be to make sure that you have put away enough money through saving and investing to secure your own retirement and financial well-being.

One of the first steps is to identify extra money in your retirement and investment accounts, which you will likely never need. I refer to it as junk money. If that extra money isn’t there, continue your efforts to secure your own future before you worry about what you’ll be able to pass on to your heirs.

Once you have addressed your own retirement needs and you’re in a position to do some legacy planning, you will want to pay attention to how your assets will transfer at death. In order to provide a smooth transfer of wealth, you may need to do some basic estate transfer planning, using trusts and proper titling, to minimize delays and unnecessary tax consequences. The advice of a good estate attorney could make a lot of difference here.

How can life insurance be a good wealth transfer tool in the legacy planning process?

One of the simplest and safest ways to help ensure an inheritance for your heirs is to purchase life insurance, assuming you are insurable. Joint life insurance policies, for married couples, may provide a higher death benefit per dollar of premium, as compared to single life policies. Consider using unneeded assets to fund the premiums, such as the annual Required Minimum Distributions from IRAs or other pre-tax plans, or the interest and dividends from your other investments. Even just setting aside a half of one-percent of your liquid net worth each year may be a relatively pain-free way to better secure a meaningful inheritance for your family.

What are some of the potential benefits of using life insurance in legacy planning?

One potential benefit would be to better secure your financial legacy. Your net worth will be subject to market forces, and may go up and down in value over time. Life insurance, looked at as an asset rather than insurance, may provide portfolio stability for your heirs, through the predictable, contractually guaranteed, and generally income tax free death benefit. Guarantees are backed by the claims paying ability of the issuing company. Another potential benefit might be to indemnify your heirs for the income taxes that they will be responsible to pay, when you leave them with substantial IRA or other qualified plan funds. Although there are various settlement options available to IRA beneficiaries, those accounts will never escape eventual income taxation. The result of this strategy may be to significantly increase the net after tax inheritance received by the heirs.

Consider using life insurance if you are concerned that your estate value may be diminished by the need for long-term care. It could be used to restore your estate values that were spent on your long-term care, after your death. The odds of any of us needing long-term care someday, although significant, are not as certain as dying is.

*Mark Pagni offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC. Annuity and insurance products offered through AXA Network, LLC. AXA Network conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC, in PR as AXA Network of Puerto Rico, Inc.

AXA Advisors and AXA Network do not offer tax or legal advice. You should consult with your professional tax and legal advisors regarding your particular circumstances. AGE 113200 (4/16) (Exp 3/18)

Insights Wealth Management is brought to you by AXA Advisors, LLC

Understand, commit to a portfolio strategy to avoid the noise

Too many investors focus on the day-to-day noise coming from the markets, scrutinizing the minute-to-minute data points and economic news, often to their detriment.

“At the end of each day, headlines will proclaim which factors moved the market up or down — ‘profit taking’ or supposedly hungry investors ‘buying the dips,’” says Daniel Roe, Chief Investment Officer at Budros, Ruhlin & Roe, Inc. “The fact is, on most days it’s impossible to pinpoint precisely what types of investors were buying and selling, and why exactly the market moved one way or the other.”

For long-term investors, he says such volatility is simply noise that contributes nothing to the conversation about successful investing and building a durable long-term portfolio strategy.

Smart Business spoke with Roe about overactive investors and implementing strategies that make more sense in the long run.

What should investors consider as they develop an investment strategy?

In managing a portfolio to meet investment goals, there are certainly more than a few strategies that can work to achieve the desired objectives.

The single most important feature of a strategy is that it will be durable over long periods of time, meaning the investor can stick with it during good and bad times. For example, investors who bailed out of whatever strategy they were using in 2008 after equity markets fell more than 50 percent likely missed out on the dramatic rise that occurred after the first quarter of 2009.

A portfolio’s exposure and allocation to higher risk investments that offer higher return potential, like stocks and private investments, should be relatively static over a period of many years, subject to true changes in the investor’s personal circumstances. That might be described as a 60/40 allocation, or perhaps as a range of allocations, say 50 to 70 percent, depending upon the relative valuation and opportunity offered over time.

When stock valuations are relatively low, a portfolio strategy might command a higher weight to these riskier, higher returning investments. However, when valuations are relatively high, then the riskier allocations might be brought down.

When it is difficult to discern whether stock valuations are on the high side or low side, investors can keep exposures close to the middle of the range, or at a neutral allocation. Such a valuation-based, risk-sensitive approach to a portfolio strategy can be made durable over time, as it does not require an investor to determine whether or not one day’s worth of news or a 1 percent movement in stock prices is worth reacting to.

The noise from a few days of activity can largely be ignored. If those days multiply, like they have in 2016, providing movements of 10, 20 and up to 50 percent in some sectors, then further consideration of assets’ valuations should be assessed once again.

When should a strategy be established and how will investors know it’s the right strategy for them?

An investment strategy is determined as a portfolio is established; at any transition point in life, such as retirement or divorce; or simply at the beginning of a new relationship with an adviser. Review the performance results over a period of a few years and compare them to the goals set at the start. If performance meets expectations, there’s probably no need to change.

How can investors keep from making knee-jerk investment decisions?

Investors who find they’re trading because of a headline or market move, or calling their adviser because of what happened over a day or two, are letting emotion guide their decision-making and that leads to trouble. It’s better to review performance on a quarterly basis and make larger portfolio decisions at unemotional times.

The investment strategy should be revisited annually. Think about the asset allocation and risk in the context of what’s changed relative to job, income and balance sheet wealth and make adjustments where appropriate. This is a multiyear decision, so don’t make it based on a week of market performance.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.

Why due diligence is essential to avoid tax problems in retirement

Nobody likes to think or talk about taxes, but they need to be part of the conversation when you’re assessing your retirement savings strategy, says Carmen Trivisonno, CRPC, vice president at AXA Advisors, LLC.

“Take a client who has most, if not all of his or her savings wrapped up in a 401(k) plan or another pretax qualified retirement plan,” Trivisonno says. “When the time comes for distribution in retirement, this person might not have the flexibility to take larger withdrawals without having to deal with the tax consequences.”

Diversification is one of the hallmarks of an effective strategy to save money for retirement along with asset allocation and rebalancing, but taking these steps does not guarantee a profit or protection against loss.

“You put some money into this bucket for this purpose and you put some money into another bucket for a different purpose,” Trivisonno says. “When you take a more diversified approach, the goal is to be more capable of dealing with the tax changes that may come in the future.”

Smart Business spoke with Trivisonno about how to develop a strategy that gives you a better chance to avoid negative tax consequences in your retirement.

How can you put yourself in a better tax position with your retirement strategy?

The spacing and timing of distributions can make a big difference. If you know you need X amount of dollars and you need to draw that money from a pretax plan that will be taxable to you and you can space it out over two years, that’s always beneficial. Take as much of the withdrawal as you can without crossing into a new marginal tax bracket.

For instance, if the top of the 15 percent tax bracket is $78,000, you would want to withdraw just enough money by the end of December to get up to that $78,000. Whatever is remaining that you still may need should be deferred to the next year so you can space the liability over a couple years. If you’re already into your retirement and all your assets have been saved into a pretax vehicle, you can still use something like a Roth conversion or the partial conversion of a traditional IRA. You do that very strategically up to the top of the tax bracket so that you can start to build in more flexibility, even if you didn’t have a chance to do it in preretirement. The suitability of this strategy will depend upon individual circumstances, so you should consult with a professional tax advisor before taking action. You should also resist the urge to take a large withdrawal to pay off a big expense like your mortgage. Consider structuring it over the course of four or five years and minimize your tax burden while still paying off the mortgage in a reasonable time frame.

What if you’ve made some mistakes in your savings strategy?

Some decisions are difficult to reverse. You may have a real estate investment trust that has no liquidity or a long-term surrender charge on a variable annuity product where it just wouldn’t make any sense to take a withdrawal or rollover because of the penalties that would ensue. It’s difficult when there are product rules to navigate. But often when it’s a situation where you just don’t know why you have a particular product in your portfolio, you can make changes and put yourself in a better position.

What is the best way to plan for an uncertain future?

By being aware of how you’re saving money from a tax perspective and understanding how those investments work, you’re going to do better than somebody who is not paying attention to those things. As we look to the future, there is the potential that tax rates will go up. But it’s hard to say when that will happen or by how much they will increase. If circumstances allow, consider saving some money pretax and some aftertax that will become tax-free.

Insights Wealth Management is brought to you by AXA Advisors, LLC

Carmen Trivisonno offers securities through AXA Advisors, LLC (NY, NY, 212-314-4600), member FINRA, SIPC, offers investment advisory products and services through AXA Advisors, LLC, an investment advisor registered with the SEC, and offers annuity and insurance products through AXA Network, LLC. AXA Advisors and AXA Network do not provide tax or legal advice. Please be advised that this article is not intended as legal or tax advice. Accordingly, any tax information provided in this advertisement is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or the marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. AXA Advisors, LLC and AXA Network, LLC do not provide tax advice or legal advice. AGE-111121(2/16)(exp.2/18)

Ignorance isn’t a defense for improperly running your retirement plan

Plan sponsors and trustees always ask “Am I paying too much for my plan?” “Are my funds outperforming the markets?” “Do you give advice to my participants?” These are great questions, but first they need to ask: “Do I know what my duties are as a retirement plan fiduciary?”

Few business owners, managers or executives appreciate the most important part of running a retirement plan. As a plan sponsor, or steward, you have a legal duty to act in the best interest of the person and organization that has entrusted you with the management and control of their retirement assets. This includes investment choices, fees, provider choices, participant education, risks, conflicts of interest and more.

“Not enough plan sponsors take this seriously, let alone understand the scope of their duties and responsibilities,” says Robert Yelenovsky, vice president and manager of Retirement Plan Advisors at Fragasso Financial Advisors. “Although these duties can be shared, they can never be abdicated. Ignorance or being too busy is not a viable defense.”

Smart Business spoke with Yelenovsky about your fiduciary duties.

What do fiduciaries need to be doing?

First, accept your legal responsibility for overseeing someone else’s retirement plan assets. Whether you’re the owner, trustee, plan sponsor, board member or investment committee member, you are a fiduciary.

Then, take time to understand your duties and responsibilities. You’re expected to provide services according to five principles:

  • Prudence, focuses on the process for making fiduciary decisions.
  • Loyalty to those you are entrusted to represent.
  • Exclusive purpose. This is ignored the most. Fiduciaries are expected to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them. You might be comfortable with your former fraternity brother being paid from the plan assets, but is he really the best person for the job?
  • Diversification of plan assets with reasonable plan expenses.
  • Adherence, where fiduciaries understand and follow the plan documents. It’s wise to document decisions and the basis for those decisions.

How can fiduciaries find where they are not fulfilling their duties?

Start with a self-assessment and gap analysis. What should our organization be doing? What is it not doing? What gaps carry the most consequence, risk or liability? Make a plan. Take action. Typically the highest risks have to do with the provider, fund choices and what those selections cost, as these generate the most lawsuits. Next is the lack of participant education and advice.

Use fiduciary audit checklists to help in this gap analysis. A checklist might have 30 items, so it can be overwhelming. Your financial adviser can help you prioritize and create a calendar to get you back on track.

These exercises take time and energy, but ignore or put them off at your peril. Not only do you expose yourself to lawsuits or Department of Labor penalties, you may cost plan assets from the very employees who help build and maintain your business. This happens through misunderstanding fees and who gets paid from them, reluctance to switch providers or adviser, or disinterest in employee education because it takes time or you think no one is interested.

Where does a co-fiduciary come in?

You can hire an experienced prudent professional who has a legal share in the outcome. The trustee or plan sponsor ultimately makes the decisions but the co-fiduciary is paid to provide the advice.

The most common, the paid 3(21) fiduciary investment adviser, provides investment selection and monitoring, provider analysis and selection, uncovers fees and benchmarking to help determine whether they’re reasonable, establishes and delivers a participant education program, and provides guidance for starting and maintaining a qualified retirement plan.

It’s a good idea to find a financial adviser who helps owners, directors, trustees and committee members understand their role as a fiduciary. Does your adviser take on this role and level of responsibility or do they outsource it? If they say they do, is it in writing? Take the time to get this right. You are trusted to do so.

Insights Wealth Management is brought to you by Fragasso Financial Advisors

Follow this plan for a more secure retirement

Considering the recent market volatility, those approaching or who are in retirement may be concerned that they’ll be withdrawing money from a portfolio that has experienced flat to negative returns. What can one do to make sure the amount withdrawn today won’t jeopardize one’s future financial independence?

“Withdrawing 4 percent has long been touted as the safe amount that can be pulled from a portfolio in the first year of retirement, increasing by inflation each year, with a less than 10 percent probability that one will run out of money,” says Daniel L. Due, CFP, Senior Wealth Manager at Budros, Ruhlin and Roe, Inc.

He cautions, however, that starting with a rule of thumb is helpful, but shouldn’t be followed blindly.

Smart Business spoke with Due about ways to safely manage retirement spending.

What is the 4 percent safe withdrawal rate based on?

The original study looked at historical data over a 30-year period and determined that, even in the worst scenario, 4 percent could be withdrawn from a portfolio and the individual would not run out of money. Under this rule, there is a high probability that a retiree will have a portfolio worth more than his or her starting principal at the end of a 30-year time horizon.

There are no set savings or income amounts, which makes the 4 percent rule applicable to most retirees. One caveat is that the investor’s savings are in a portfolio with at least 50 to 60 percent in U.S. stocks and the rest in U.S. long-term bonds.

The sequence of returns and inflation rate matter. The correlation between the first year return and the safe withdrawal rate is very low, so one must look at returns over a longer time period. One must also consider inflation rates over those time horizons and focus on real rates of return.

How does one determine how much can be safely pulled out of one’s portfolio?

Diversification is an important consideration. The original study was based on an asset allocation of approximately 60 percent in U.S. large-cap stocks and 40 percent in U.S. long-term bonds, rebalanced annually. Subsequent studies have shown that additional allocations into other asset classes such as U.S. small-cap stocks, as well as stocks and bonds of non-U.S. companies, provides greater diversification and can result in increased withdrawals. Other sources of income, such as a pension or Social Security that kick in at a later time, must also be taken into consideration.

Receiving an inheritance at some point is something else to consider, but carefully assign the probability of receiving one and be conservative in regards to the amount so that too much weight isn’t placed on that one assumption.

Don’t forget to take taxes into consideration when determining how much you’ll need from your portfolio. For example, once someone begins pulling from assets like an IRA, 401(k) or 403(b), these withdrawals are taxed as ordinary income and the tax should be budgeted for.

How can one be assured that their retirement nest egg will last?

First of all, avoid some of the mistakes that many retirees make that can lead to having less money than they hoped. Top among them is not paying attention to what you are spending. Take the time to outline a budget of annual expenses and don’t forget to account for one-time expenses such as bigger vacations and home maintenance/remodeling projects. Those who have a better handle on what they spend find it easier to make adjustments and decrease withdrawals in a down market.

Stick to an asset allocation strategy, rebalance at least quarterly and don’t increase your spending just because the market experiences a banner year. Establish a cash reserve strategy by setting aside the cash you’ll need to withdraw from your portfolio over the next 18 to 24 months. That will provide peace of mind that the funds are there to weather any storm and reduce the need to sell in a down market, thus locking in short-term losses.

If an investor was disciplined and made good decisions during his or her working years to generate a portfolio that’s sufficient for retirement, prudent decisions will continue to be made that avoid trouble.

Insights Wealth Management is brought to you by Budros, Ruhlin & Roe, Inc.