Economists and market watchers have been warning investors about the prospect of increased inflation since the housing bubble burst in 2007.

Worries about inflation have been cropping up more frequently lately, largely due to escalating commodity prices, which are pushing up consumer prices, both in the United States and abroad. With an improving economy and soaring federal deficits, many experts feel that prices in the United States will inevitably pick up their pace.

Inflation Rates Around the World (as of November 30, 2012)²

Staying Ahead

For investors, staying ahead of inflation means choosing investments that are most likely to provide returns that outpace it. Here’s a look at how a climbing inflation rate could impact various investment types and asset classes.

• Domestic Stocks – Although past performance is no guarantee of future returns, historically, stocks have provided the best potential for long-term returns that exceed inflation. An analysis of holding periods between 1926 and December 31, 2011, found that the annualized return for a portfolio composed exclusively of stocks in Standard & Poor’s Composite Index of 500 Stocks was 9.83% — well above the average inflation rate of 2.99% for the same period. However, over shorter time periods the results are not as appealing. For the 10 years ended December 31, 2011, the S&P 500 returned an average of only 2.92%, compared with an average inflation rate of 2.50%.³
• International Stocks – During the same 10-year span that ended December 31, 2011, the Morgan Stanley Capital International (MSCI) EAFE, which is composed of established economies such as Germany and Japan, outpaced U.S. inflation with an average return of 5.12%. The MSCI Emerging Markets index, which tracks developing world economies such as Brazil and China, was even more stellar, returning an average of 14.2%.⁴
• Bonds – Historically, investors have turned to shorter-term corporate and high-yield bonds for protection in rising-rate environments.⁵ There are two types of bonds that receive a lot of investor interest when inflation starts to rise: Treasury Inflation-Protected Securities (TIPS) and I Savings Bonds. Both TIPS and I bonds are types of fixed-interest rate bonds whose value rises as inflation rates rise.
• CDs and Other Cash Instruments – The Federal Reserve is still keeping a tight lid on interest rates, forcing investors who hope to keep pace with inflation by investing in cash instruments facing a harsh reality. The rates on a one-year CD are averaging under 1%, while a five-year CD is yielding an average of under 2%, according to Bankrate.com. Money market and other bank savings accounts are also averaging well under 1%.⁶

Although many economists project overall U.S. inflation to remain modest in the near future, most see an uptick down the road. For investors, a well-rounded portfolio may be your best weapon. The key is to consider your time frame, your anticipated income needs, and how much volatility you are willing to accept, and then construct a portfolio with the mix investments with which you are comfortable. Consult your financial professional to discuss your specific needs and options.

Source/Disclaimer:

¹Source: U.S. Bureau of Labor Statistics, January 2012.

²Sources: TradingEconomics.com; U.S. Bureau of Labor Statistics, January 2013.

³Sources: Standard & Poor’s; U.S. Bureau of Labor Statistics. The S&P 500 is a unmanaged index. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

⁴Source: Morgan Stanley. The MSCI EAFE and MSCI EM are unmanaged indexes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

⁵Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

⁶Source: Bankrate.com, January 20, 2012.

Rarely do we find commentary on tax delevopments, much less estate tax developments to be fun or entertaining but… In the following piece written by Bob Veres of Inside Information, you are sure to find good actionable information as well as a few comments to upset attorneys and insurance agents. In short, it offers the perfect combination of wit and wisdom. In case you’re wondering, we have obtained permission to republish Bob’s work. CHEERS!

Estate Planning Relief by Bob Veres

The conventional wisdom among the attorneys and CPAs who plan for estate taxes, right up until the new Fiscal Cliff legislation was signed into law, was that the $5 million exemption was probably too good to be true.  Couples could gift up to $10 million to their heirs without paying any gift taxes, and if you died with less than $5 million in your estate, your spouse could pick up the remainder and add it to his/her exemption, meaning that any family with less than $10 million in assets passing on to heirs could, with virtually no planning, escape federal estate taxes altogether.

A deal like that won’t last in this age of budget deficits, right?  During calendar 2012, the assumption was that Congress would set a lower exemption of anywhere from $1 million to $3 million per individual.  So estate planning professionals busied themselves drafting irrevocable grantor trusts and advising their clients to put millions of dollars out of reach of the anticipated new estate tax realities.

Then something funny happened: when it passed the American Taxpayer Relief Act of 2012, Congress not only made the $5 million exemption permanent, it also indexed those historically-high exemption amounts to inflation, so that this year the personal estate tax exemption climbs to $5.12 million.  And contrary to virtually every professional expectation, Congress also kept the gift tax exemption at the same level as the estate exemption–and made THAT permanent.  Many were speculating over the past couple of years that the linkage between the gift tax and estate tax exemption had been a careless mistake by the committee members who had drafted prior legislation.

The result?  Assuming these thresholds stay permanent, the overwhelming majority of American citizens won’t have to face an estate tax ever again.  They won’t have to consult with an expert to concoct a lot of fancy strategies, like putting their investment assets in an LLC and then gifting shares of the LLC at a “minority interest valuation discount” (don’t ask), or buying permanent life insurance inside a carefully-crafted insurance trust, or creating a grantor trust that is defective under IRS rules so that the grantors also pay the taxes on those assets on behalf of their heirs.

Meanwhile, a lot of trusts that were set up in the last two years are probably unnecessary under the new tax regime, and a lot of estate tax experts and life insurance professionals are looking for a new service model.  They might look into finding ways to minimize the tax consequences of the new trusts they created–which are often not the most tax-efficient vehicles on the planet.  The new 39.6% top tax rates affect taxpayers with more than $400,000 (individual) or $450,000 (joint) in income.  But that highest rate kicks in at just $11,950 in non-distributed income for a trust.  A trust’s capital gains are hit almost immediately at the highest possible rate–20% plus the 3.8% Medicare tax.  This is true even if the beneficiaries are in a much lower tax bracket.

Meanwhile, one of the more amusing consequences (assuming you’re one of the few people who finds estate tax issues humorous) is the sudden impact all this is having on the 16 states which currently impose their own estate taxes.  Suppose, for example, a person with $4 million in assets lives in New York, which has a state estate tax exemption of $1 million.  After that, the state taxes the deceased’s assets at a 16% rate.  But currently there is nothing to prevent this person from gifting $3.1 million to her heirs on her deathbed, thereby taking her state-taxable estate below the threshold.

For many people, these permanent higher thresholds are great news, and will greatly simplify their lives.  Millions of dollars will no longer have to be spent on trusts and creative strategies, streamlining the economy.  Now just need to figure out something that the attorneys and accountants who crafted fancy ways to reduce the tax bite can do with all their free time.

Sources:

http://www.forbes.com/sites/ashleaebeling/2013/01/09/tax-hikes-hit-trusts-hard-beneficiaries-pull-money-out/

Unless you were living on the moon this past week, you know that Washington policymakers finally reached a so-called “fiscal cliff” deal that avoids a sudden return to tax rates that are now more than a decade old. But for some reason, news outlets have been a bit stingy about telling us exactly what’s in the American Taxpayer Relief Act of 2012.

The good news is that our lawmakers are creeping closer to reality about how to define “the rich;” rather than $200,000 (single taxpayers) or $250,000 in adjusted gross income (joint returns), as specified in many prior proposals, “the rich” are now defined as making more than $400,000 (single) or $450,000 (joint). For taxpayers whose income falls below those thresholds, the temporary Bush-era tax cuts have (for the first time) been made permanent, which means that for most taxpayers, the marginal tax rates will remain the same this year as they have been for the past two. However, taxpayers who fit this new definition of “the rich” will experience a new 39.6% upper tax bracket. They will also be required to pay taxes on capital gains and dividends at a 20% tax rate. (The 15% rate still applies to taxpayers below the thresholds.)

In addition, the Taxpayer Relief Act borrows something from the Clinton era tax code: itemized deductions and the personal exemption will once again begin phasing out for individuals with more than $250,000 in adjusted gross income, or couples with more than $300,000 AGI. At $372,501 (single) or $422,501 (joint) of adjusted gross income, personal exemptions are phased out in their entirety.

The tax bill also makes permanent the current $5 million estate and gift tax exemptions ($10 million for couples), but raises the tax rate for money transferred to heirs above that amount from 35% to 40%. And it offers a permanent fix to the perennial alternative minimum tax problem by inflation-indexing the threshold (currently $78,750 for joint filers; $50,600 for individuals) at which people have to calculate their AMT, exempting all but about 5 million taxpayers from this chore now and in the future.

Also eliminated: the two percentage point reduction in the Social Security payroll tax–a stimulus measure enacted in 2010, which is likely to be the biggest impact of the legislation on most taxpayers. The payroll tax rises from 4.2% last year to 6.2% this year.

Finally, the new tax law makes $24 billion in federal spending cuts, while giving Congress two additional months to decide what to do about $109 billion of automatic spending cuts that were scheduled to begin taking effect at the start of this year.

You can expect those two additional months to be spent in partisan wrangling over where, exactly, federal expenses should be cut, and news outlets have been repeating over and over the fact that March 1 also happens to be the next time that Congress has to vote to raise the debt ceiling. We don’t know whether that next debate will spill over into tax rates once again, but we will be paying attention and will keep you posted.

Bob Veres

By Bob Veres

We’re hearing a lot about the fiscal cliff in this post-election time period, and surprisingly, considering the angry partisanship of the campaign, some of the news is encouraging.  The White House and Congressional leaders, elected officials from both sides of the aisle, are saying that they believe they can reach agreement before the end of the year.

What is this fiscal cliff?  The term refers to a lot of different tax and budget provisions that are all scheduled to take place automatically at midnight on December 31.  These include:

Higher tax rates.  When the clock strikes twelve, the Bush-era tax cuts will expire, eliminating the 10% tax bracket altogether, and moving the current 25%, 28%, 33% and 35% brackets up to 28%, 31%, 36% and 39.6% respectively.  At the same time, the 0% capital gains tax rate for lower-bracket Americans would bump up to 10%, and the tax rate on dividends would rise to 15% or 28%, depending on the recipient’s income tax bracket.

The loss of deductions–including a provision that eases the so-called “marriage penalty,” some deductions for college tuition, child tax credits, dependent care credits and a particularly harsh phase-out that would eliminate up to 80% of some taxpayers’ itemized deductions for mortgage interest, state and local taxes, and charitable donations.

Random across-the-board budget cuts that nobody intended to see enacted.  The Budget Control Act of 2011–what most of us remember as the tense compromise that ended last year’s budget standoff–calls for automatic government spending cuts of $1.2 trillion from the federal budget over the next 10 years.  The cuts apply to just about every discretionary (non-Social Security, Medicare, Medicaid) program in Washington, although most of what you’re hearing about are reductions in the defense and education budgets.

The expiration of stimulus measures:  The Obama-era payroll tax cuts will go away, raising taxes by about two percentage points for workers.

Why do we call this a “cliff?”  Because everything on that list would take money out of the hands of taxpayers and, at the same time, lower government spending—essentially providing the U.S. economy with the opposite of a government stimulus, what some have called a hard punch in the gut. The Congressional Budget Office estimates that if we go over the cliff–that is, if Congress and the President don’t act between now and the end of the year–a total of $560 billion would exit the economy.  The CBO estimates that this would reduce America’s total economic activity in 2013 by four percentage points.  Hello recession!

So what are the odds that Washington will get its act together and choose a course that doesn’t take us over the cliff?  As it happens, there is reason to hope.  Leaders on both ends of the partisan divide agree on many things in this negotiation: that the tax cuts are too painful and random to allow in their present form, and that tax rates on American taxpayers with less than $250,000 in income should continue as they are today.  The sticking points are if or how much tax rates should rise for Americans in the higher tax brackets, and where to apply the budget knife.

This rare moment of meaningful negotiation offers Washington policymakers a chance to expand the discussion and come up with a long-term solution to the nation’s debt problem—which is, after all, the topic of debate which led Congress to create this fiscal cliff in the first place.  If you’re optimistic, then cross your fingers that the leaders in the room will want to do something more with this conversation than just address the immediate problem.

As you follow the debate, pay attention to whether our elected officials are actually tackling the issues or just kicking the can down the road yet again.  If you hear discussion about permanent laws, such as a balanced budget amendment, or a framework that forces Congress to offset any expenditures with cuts elsewhere, or a change in tax rates, or some kind of entitlement reform (Means testing?  Raising eligibility ages?), that will be a sign that Washington is getting serious about addressing real issues.

If, on the other hand, you hear about caps on future appropriation bills, or frameworks for deficit cutting, or solutions which sunset in 12 or 24 months, that means that we’ll be going through a version of this debate for the foreseeable future, and the can could be kicked, once again, far enough down the road to become a 2016 Presidential election issue and a headache for the next President to deal with.

We should also pay attention to the timing.  The longer the U.S. economy continues to march straight toward the edge, the longer businesses will be reluctant to hire or invest in the future.  But for now, this moment may be something to enjoy.  How often do we see Democratic and Republican leaders in the same room together, promising to get something done?  Maybe it will become a habit.

Sources:

http://news.yahoo.com/blogs/ticket/obama-lawmakers-hold-constructive-talks-taxes-deficit-174256300–politics.html

http://www.smartmoney.com/taxes/income/how-the-expiring-bush-tax-cuts-affect-you/

http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm

In order to gauge the health of 401(k) plans, understand compliance issues and the effectiveness of voluntary compliance, plus determine how they can encourage compliance, the IRS conducted a nationwide survey of 401(k) plans. They prepared the Section 401(k) Compliance Check Questionnaire and distributed it to 1,200 plan sponsors across the country in May 2010. A whopping 98 percent of the plan sponsors responded.

The data was condensed to a representative sample of the population of the nation’s 401(k) plans, and it was stratified into four categories based on the number of participants within the plans: 0 to 5 participants, 6 to 100 participants, 101 to 2500 participants and 2500+ participants. The questionnaire requested information in the following areas:  demographics, plan participation, employer and employee contributions, top-heavy and non-discrimination rules, distributions and plan loans, other plan operations, designated Roth features, IRS voluntary compliance and correction programs and plan administration.

The Tax Exempt and Government Entities (TE/GE) division of the IRS released an Interim Report in February 2012 summarizing the results of the questionnaire. The findings revealed the top 10 common plan design problems, which are outlined below. These results are an excellent resource for all plan sponsors, who can use them to check the health of their plan.

1. Plan Document failure
Recommendation: Review and update the plan document, since laws regarding 401(k) plans frequently change.

2. Failure to follow the terms of the Plan document
Recommendation: Make sure the operation of the Plan follows the terms of the document. Inform affected participants in a timely manner regarding any changes to their Plan.

3. Failure to use the Plan’s definition of compensation
Recommendation: Review the Plan to ensure the definition of compensation is consistent throughout.

4. Failure to follow the Plan’s matching contribution provisions
Recommendation: Find the correct matching contribution formula in the Plan document, and make sure it matches the actual matching contribution formula in operation.

5. Failure to satisfy the ADP/ACP nondiscrimination testing
Recommendation: Understand the ADP/ACP test requirements. To pass the test, the average deferral percentage for Highly Compensated Employees (HCEs) cannot exceed that of Non Highly Compensated Employees (NHCEs) by a certain amount. The HCE deferral percentage cannot be greater than two percent plus the average NHCE deferral percentage, or two times the average NHCE deferral percentage, whichever is smaller. By definition, HCEs have W-2s of at least $110,000 or ownership of at least five percent in the business. If the plan fails the ADP test, consider using Safe Harbor plans, or changing the definition of HCE to include the top 20 percent of employees with the highest pay.

6. Failure to include all eligible employees
Recommendation: Review the plan document to find when employees become eligible for entry, and make contributions for employees that compensate them for the missed deferrals.

7. Failure to limit elective deferrals to the IRC 402(g) limits for the calendar year
Recommendation: Review the deferral amounts for each participant to make sure it falls within the legal limit, and distribute the excess deferrals.

8. Failure to timely deposit elective deferrals
Recommendation: Find out the earliest date that deferrals can be separated from other assets, and make sure deferral deposits are made by this date.

9. Failure to follow the Plan’s loan provisions and violation of IRC 72(p)
Recommendation: Ensure all outstanding loans comply with the Plan document’s terms, and make changes to loan terms accordingly.

10. Failure to follow the Plan’s terms regarding hardship distributions
Recommendation: Review all hardship distributions to make sure they follow the rules within the Plan document.

The IRS has created a 401(k) Plan Fix-It guide, which all plan sponsors can use to test the health of their plan and to check if they made any mistakes. It is highly recommended that all plan sponsors review the checklist of the top 10 problems listed above, and also review the IRS’ 401(k) Plan Fix-It guide to understand the steps to fixing these problems. Finding mistakes and fixing them early avoids the possibility of penalties.

If you’d like help with your client’s 401(k) plan, please contact Rob Hoxton, the President of HFI Wealth Management by phone at 304.876.2619 or by email at Rhoxton@hfiwealth.com.

Please keep us in mind if you have clients and colleagues who could benefit from a financial checkup or second opinion with HFI Wealth Management. We welcome your referrals. Thank you for your continued confidence.

Shepherd financial planning team selected to compete at national conference

ISSUED: 13 September 2012 MEDIA CONTACT: Valerie Owens (Shepherd financial planning team selected to compete at national conference)

Shepherdstown, WV–A team from Shepherd University’s financial planning club will compete in the 2012 Financial Planning Challenge at the Financial Planning Association’s annual conference in San Antonio September 29 to October 2.

“It’s an amazing experience for us because not only do we get to compete, but we get to network while we’re down there and meet all kinds of people in the industry and go to different seminars,” said team member Jennie Tomcho, a business administration senior from Martinsburg.

The challenge was created to support the next generation of financial planners by engaging students and program directors, raising awareness of career opportunities, and encouraging learning and networking in the profession.

In the first phase of competition, the Shepherd students beat a dozen other teams who all had to create and submit in June a financial plan, including areas like retirement, college-saving, and taxes, without software, for a fictional family.

A total of eight teams go on to the conference and will give oral presentations about their case studies and then participate in a game-show style financial-planning knowledge test. The winners take home $10,000 for their school. The other teams represent Colorado State University, Kansas State University, Texas Tech University, Virginia Commonwealth University, and three teams from Virginia Tech.

Melanie Vincent, from Hedgesville, and Ginny Huston, from Falling Waters, round out the Shepherd team. All three competitors are seniors majoring in business administration with financial planning concentrations. Huston has a second major in accounting.

“The fact that this team made it to this level in the competition is huge,” said club community mentor Rob Hoxton, CEO of HFI Wealth Management. “There’s so much buzz about Shepherd’s program throughout the national circles.”

Hoxton is also president of the Rural Financial Planning Project advisory board, whose members are local financial professionals who guide and support Shepherd’s financial planning program and club. The RFPP board provides tuition assistance, mentorship, internships, and careeropportunities for students, as well as professional development opportunities for faculty.

Dr. E. Gordon DeMeritt, chair of the business administration department, advises the financial planning club at Shepherd, which helps students with financial planning employment, internships, scholarships, and resume building.

The Financial Planning Association is a leadership and advocacy organization connecting those who provide, support and benefit from financial planning. The members network, meet other planners, and get continuing education credits at the conference, Hoxton said.

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Do You Know Where Your Money Is?
How to Rollover Your Old 401(k) Assets
by Rob Hoxton, CFP®, AAMS®, AIF®

The 401(k) plan is one of the most popular retirement plans available. Employers typically offer these plans for the benefit of their employees. However, many people will change jobs multiple times in their lives, and for some, this can mean having several 401(k) accounts, complicating retirement savings and loosing track of assets.

Cashing Out or Rolling Over
When employees leave their positions, they have three options for their 401(k) plan assets. First, they can cash out their 401(k)s. However, withdrawing funds from a 401(k) plan results in taxes on the money taken out and can also lead to a 10 percent early withdrawal penalty (if the employee is under age 59 ½). Both of these fees eat into savings and can potentially postpone retirement. These losses are entirely preventable with options two and three.

The second option for an old 401(k) plan is to roll it into a new employer’s 401(k) plan. In most cases, new employees are eligible to rollover their old funds into new accounts. However, there are several drawbacks associated with this option as well. Since 401(k)s are employer-sponsored plans, participants (the employees and investors) are tied to the rules and limited by the investment options offered within their new companies’ 401(k) plans. In addition, certain 401(k) plans will have excessively high fees associated with them. Like the penalties of the first option, fees can hurt potential growth.

The final choice available for prior companies’ 401(k) funds is to rollover the assets into an IRA. Either brokerage firms or mutual fund companies will hold the IRA, and the account itself can either be a traditional or Roth IRA. Each of these options has their own benefits and disadvantages.

Brokerage firm-held IRAs, while offering the most flexibility, typically have the highest costs. Although these accounts allow accountholders to invest in stocks, bonds, mutual funds and exchange traded funds, certain brokers charge high transaction fees. Conversely, rolling over assets to a mutual fund company is usually the least expensive investment method. However, accountholders are limited to the funds offered by their mutual fund companies.

The second consideration for IRAs is whether to open a traditional or Roth IRA. In a traditional IRA, contributions to the account are pre-tax, and the funds are taxed upon withdrawal. Roth contributions are made on a post-tax basis, and the money in the account grows tax-free and is not taxed upon dispersal. Because traditional contributions are normally made in higher amounts (since they are not taxed), the traditional IRA funds tend to grow more rapidly. However, if the tax bracket that the investor will be in upon retirement is a concern, it may be safer to invest in a Roth IRA that will be untaxed during the investor’s golden years.

There are other tax considerations when rolling over 401(k) assets. Both 401(k) to 401(k) and 401(k) to traditional IRA rollovers will not affect the taxable income of the investor. A 401(k) to Roth IRA will affect taxable income and can potentially increase the investor’s marginal tax rate.

Rolling Over Your 401(k)
If you rollover your 401(k), there are several steps you must take to ensure a smooth transition:
• Check with your current 401(k) provider for eligibility and gather the necessary forms. If your previous employer has not yet notified their 401(k) provider that you have severed ties with them, you may be temporarily ineligible for a rollover. Often, providers will deny claims without any reason given, and this discourages many investors who may not attempt to rollover their funds again. If you are able to roll the funds over, you should ask your former employer for necessary forms in order to begin the process.
• Ask what your new provider needs. Your new provider will need a different set of paperwork in order to accept your rollover. Make sure you obtain the required information from your current provider to fill out the new forms properly.
• Make sure you select the right options. Occasionally, it can be difficult to fill out all the paperwork required. If you make a mistake, the rollover process can be delayed, costing you time and causing frustration.
• Follow-up with the providers until you are sure the process is complete. After you submit all the paperwork, you should follow-up with both companies until the process is complete. If your funds haven’t been deposited after a few weeks, check with the companies to make sure all the paperwork was received and was correct.
If you don’t have time to gather the forms and complete the paperwork, a financial advisor can help you with the process.

A 401(k) rollover offers many advantages for old plan funds. It is important to assess all your options before making any investment decisions, and if necessary, seek the help of a qualified financial professional.

Rob Hoxton CFP®, AAMS®, AIF® is the President and CEO of HFI Wealth Management., a leading fee-only investment advisory firm. He is a co-founder of the Rural Financial Planning Project. He began his career in the financial services industry in 1986, and he has won numerous awards for his work in the wealth management area. Mr. Hoxton is the developer of The Grow Greenr® Method and the author of Grow Greenr, 10 Steps to a Richer Life, which is available at Amazon.com and Investing in Uncertain Times, which can be downloaded as a PDF file from www.HFIwealth.com. He can be reached at RHoxton@HFIwealth.com or at 304-876-2619.

The idea of working hard and saving money for your “golden years” is a familiar concept. In fact, many people have retirement plans set up either through their employer or individually to help them lock away money for the glorious years of retirement. However, many employers (plan sponsors) and employees (plan participants) don’t realize that a percentage of the money that they contribute to their retirement plan is actually being taken out by their service providers to cover annual fees and, in the past, some of these service providers have charged high amounts.

Now all this is about to change. On July 1st, the Department of Labor’s regulation 408(b)(2) will take effect. This new regulation, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires that service providers supply all information about their fees, affiliates and subcontractors to plan sponsors. The purpose of 408(b)(2) is to improve fee disclosure principles and business relationships.

While fees are necessary for the many aspects of establishing and maintaining retirement plans, excessive fees have eaten away at plan assets. Fees are typically paid out to the service providers and are used to cover bookkeeping expenses, audits, legal counsel, education and a multitude of other tasks. Fees are also paid to investment managers, so assets can be properly administered and held.

Once they are informed about service providers’ and investment managers’ fees on or before July 1st, plan sponsors then have to disclose this information to their plan participants by August 30th under Department of Labor regulation 404(a)(5). The main goal of this regulation is to help participants understand the fees that are associated with their retirement plans. The knowledge about fees can help participants make educated decisions regarding their retirement plans.

The implementation of fee disclosure is bound to create competition between service providers. This gives plan sponsors an ideal opportunity to research different service provider’s fees and evaluate which ones are “reasonable.” This new regulation requires that plan sponsors read, understand and assess the information about the plan’s fee. The plan sponsor is also responsible for reporting incidents where fees are not disclosed.

In addition to fee disclosures, another retirement plan issue that is currently being debated in Congress is ERISA 3(21). The definition of a “fiduciary,” regarding a retirement plan, is someone who has authority or control over the plan. However, Congress is looking to expand the definition of a “fiduciary” to include “providing investment advice.” According to the Department of Labor, this broader definition is “designed to protect participants from conflicts of interest and self-dealing.”

By making more people subject to fiduciary duties, the rule would provide greater protection for plan participants. ERISA 3(21) fiduciaries, however, do not have control over the plan, and the plan sponsor makes the final investment choice.

The Department of Labor is considering whether distribution/rollover recommendations should be categorized as “advice.” This would also give greater protection to participants since their advisor would be subject to the fiduciary standard of impartiality and prudence.

At this date, Congress has agreed to withdraw the proposal until further information can be obtained. There is a chance that changes to the definition of “fiduciary” might take effect this year.

The new regulations presented by the Department of Labor are precedents set forth to protect both retirement plan sponsors and plan participants and help clear up communication issues, so that information is readily accessible and comprehendible. This year presents a multitude of new regulations that are sure to keep service providers on their toes and increase the knowledge of retirement plan sponsors, as well as participants.

The Federal Reserve’s recent announcement that it will maintain the federal funds rate in a range between 0.00% and 0.25% through December 2014 has generated the usual analysis about whether Chairman Bernanke and his colleagues are doing the right thing. But the Federal Reserve’s policy may be less about right versus wrong than about the trade-offs for investors and consumers.

When the Federal Reserve makes a determination about movements in interest rates, it bases its decision on prospects for economic growth and whether existing growth can be sustained. The Federal Reserve considers the outlook for inflation, the federal budget, consumer finances, corporate earnings, and a variety of other factors. Maintaining interest rates at a historically low level, which has been the Federal Reserve’s policy since December 2008, is a tool for stimulating economic growth.

A Domino Effect

The fallout from the Federal Reserve’s actions can be significant. The federal funds rate influences the prime rate, which in turn has a bearing on rates that lenders charge for consumer and corporate borrowing. When the prime rate is relatively low, lenders may offer lower rates for mortgages, credit cards, and other forms of credit than they otherwise would. It is important to remember that consumer demand and a household’s creditworthiness are also significant factors in interest rates assessed by lenders.

There are other plusses associated with low short-term rates. Borrowing costs are relatively low for corporations, which can impact earnings and escalate stock market returns.¹ In addition, with banks offering marginal returns on savings products, investors have a strong incentive to add to equity allocations with the goal of earning higher returns.

A Flip Side

Just as low short-term interest rates bring certain benefits, there may be drawbacks for investors and also for the broader economy. When short-term rates eventually go up, the situation is likely to be a negative for bondholders because of the inverse relation between interest rates and bond prices.² Historically, rising interest rates have caused the prices of existing bonds to decline because newly issued bonds carry higher rates, which push down the value of previously issued securities. Holding a bond until maturity, when an investor can recoup principal, can lessen interest rate risk.

Low interest rates also are a potential negative for savers, in particular retirees who depend on savings products to finance living expenses. In addition, there remains the question of whether low short-term interest rates encourage certain investors to gravitate to assets that are relatively risky given the investor’s tolerance for volatility and time horizon. A recent blog post noted that flows into high-yield bond funds have exceeded those for ultra-short and U.S. government bond funds.³

Economic policy frequently presents both plusses and minuses, and low short-term interest rates are no exception. You may want to evaluate your exposure to interest rate risk and think about how you will cope with the situation when Federal Reserve policy changes.

Source/Disclaimer:

¹Investing in stocks involves risks, including loss of principal.

²Bonds are subject to market and interest rate risk if sold prior to maturity. Bonds are subject to availability and change in price.

³Source: www.vanguardblog.com, “Why Investors Should Ignore the Fed,” April 19, 2012. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer.

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