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Understanding the Roth 401k – Introduction, New Rules, Comparisons with Traditional 401k

February 17th, 2011 | Comments Off on Understanding the Roth 401k – Introduction, New Rules, Comparisons with Traditional 401k | Posted in Business

Introduced in January 2006 under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401k is different from the traditional 401k plan because contributions are made after-tax (meaning after tax has been deducted off your pay). The Roth 401k is very similar to the Roth IRA; investors receive no tax deduction on annual contributions, but any withdrawals or proceeds will not be subject to tax either. Investors who own 403b plans are also eligible to contribute to Roth 401k. The government was more than happy to introduce this new piece of legislation because it means investors will pay more tax now, rather than making salary deferral contributions as in the case of traditional 401k plans.

The Roth 401k works inversely with a traditional IRA. With a traditional IRA, an investor receives current tax deduction after making contributions. Instead of this money going to the IRS now, it will stay with the investor and he can invest it in stocks/bonds/mutual funds or real estate. Over time, this money will grow tax-deferred. The government likes this idea too because say after 30 years of investing in various stocks/commodities/real estate, an investor has grown his money from $50,000 to $200,000. If he withdraws this money from his IRA, he will have to pay taxes not on the initial $50,000 but on the whole $200,000!

The Roth 401k works inverse with the above idea. The money you earn this year is taxed this year. You make contributions to a Roth 401k from your after-tax earnings. When you reach the age of 59.5 or more, you are eligible to make withdrawals that are not taxable (because they have already been taxed). The prospect of receiving tax-free money upon retirement is an idea liked by many investors. The idea of receiving tax dollars now is very much liked by the government such that some senators have proposed getting rid of traditional 401k plans or IRAs.

Roth 401k Works Best if:

The federal government increases taxes over time
You are a high income earner who has a compensation cap on Roth IRAs (maximum compensation cap of $245,000 in 2011)
The mutual funds or stocks where you put your Roth 401k capital experience significant returns
You are a young investor and need more time for your account to grow across various investments such as mutual funds, stocks, commodities, etc.
You are in a lower tax bracket now and will be in a higher tax bracket upon retirement

Understand the Advantages of Roth 401k

i) Unlike the Roth IRA that has income limitations that will restrict high income earners from deducting the maximum tax off their earnings, the Roth 401k has no income limitations. The maximum compensation cap for Roth IRA is $101,000 for 1 individual, or $159,000 for for joint tax payers. In the case of the Roth 401k, there is no such compensation cap.

Note: The contribution limit for Roth 401k for 2011 is $16,500 for people under the age of 50, and $22,000 for people over the age of 50.

ii) Roth 401k provides tax-free withdrawals upon your retirement, and this idea is very appealing to investors.

iii) Also because of uncertainty regarding future tax legislation, it is better to lock in a lower tax rate now, than to wait upon retirement and pay taxes then. This is especially true for young investors who are earning lower incomes.

Disadvantages of Roth 401k

i) If you get terminated from your job or laid off and are forced to take a distribution of your Roth 401k assets, you are NOT exempt from paying taxes and will have to pay them.

Important Things You Should Know

Here are some of the important characteristics of Roth 401k that you should know about

i) Roth 401k is Voluntary – That’s right, Roth 401k is voluntary for employers. In order to offer Roth 401k for their employees, employers have to set up a tracking system that segregates Roth assets from the company’s existing plan. This tracking system is expensive to build and maintain, and employers may not choose to do it at all. If so, your employer will not be eligible to offer Roth 401k.

ii) Also, any matching contributions that your employer makes towards your Roth 401k must be deposited into a traditional 401k plan. Go figure!

iii) Unlike Roth IRAs, people who reach over the age of 70 and 1/2 must take minimum required distributions (MRDs) from their Roth 401k. This forces investors to take distributions even if they don’t want them or need them. Why wouldn’t they want them? Some investors like to leave behind inheritances for their children and grandchildren, and taking MRDs is not an option.

iv) If you think you are in a lower tax bracket now and will be in a higher tax bracket upon retirement, use a Roth 401k. If you think you will be in a lower tax bracket upon retirement and are thus in a higher tax bracket now, a traditional 401k makes sense.

v) Assets in a traditional 401k cannot be converted into a Roth 401k.

Unscrambling Fiduciary Confusion

February 17th, 2011 | Comments Off on Unscrambling Fiduciary Confusion | Posted in Business

By Matthew D. Hutcheson, MS, CPC, AIFA™, CRC®, an independent professional fiduciary and a nationally recognized authority on qualified plans and fiduciary responsibility.

Every now and then “industry experts” write and distribute confusing or misguided information that unintentionally helps professional fiduciaries. Upset and confused plan sponsors turn to professional fiduciaries to “unscramble industry messages.”

Plan sponsors want and need to rely on someone who is legally accountable to plan participants. It is confusing and frustrating to plan sponsors to discover the person they hired to help with its 401k plan has no real fiduciary responsibility and hence has no real accountability; accountability that plan sponsors and participants always believe existed!

In seeking clarity about the “type” of 401k professional it has retained, plan sponsors often find the answers they are given to be incoherent with a slant in favor of the 401k industry instead of plan participants. The residual fuzziness plan sponsors are left feeling about this topic is a source of significant irritation to them. Eventually a professional fiduciary will be sought to clarify the confusion, and by so doing, will establish an authentic relationship of trust with the plan sponsor. Professional fiduciaries stand to reap the benefits from the frustration and confusion generated by our well-intentioned colleagues.

Fiduciary Clarity

The various fiduciary roles for qualified retirement plans are spelled out in the Employee Retirement Income Security Act (ERISA). ERISA identifies six general categories of fiduciaries:

1. Named Fiduciary
2. Plan Administrator
3. Trustee
4. Investment Manager
5. Investment Advisor
6. Others that owe a duty of loyalty or act with discretion or authority “to any extent.”

1. The Named Fiduciary

A qualified retirement plan, as described in section 401(a) of the Internal Revenue Code (IRS), is one that meets the definition of a pension benefit or employee benefit plan under ERISA sections 3(2) and 3(3), respectively. Such a plan, most often a 401k plan established for a business, comes into being once plan documents have been drafted and signed.

A responsible party must be named in the plan documents with the duty and the power under ERISA to, in effect, “run” the plan. That party is called the “Named Fiduciary” and it is described in ERISA section 402(a). The Named Fiduciary, which can be an employee of the plan sponsor or even an independent party, has the duty to control, manage and administer the plan, according to ERISA section 402(a)(1). The Named Fiduciary is the primary decision maker in making a qualified retirement plan work; it is the person with ultimate day-to-day responsibility for that.

The Named Fiduciary is always considered a fiduciary within the meaning of ERISA section 3(21). That’s why I have referred to such a fiduciary as a “full scope” 3(21) fiduciary (see Sears Roebuck & Co., 2004 N.D. Ill. Mar 3 2004). This is merely one descriptive term for such a fiduciary but other terms that are used such as “full service trustee” or “discretionary trustee” could serve just as well in some instances. (see page 7 of “Evaluation of the Full Service Discretionary Trustee Services Offered by The American National Bank of Texas Wealth Management Group Trust Division,” July 2007, by Bruce Ashton and Debra Davis of the law firm of Reish Luftman Reicher and Cohen, now Reish & Reicher). The term “trustee” as used in this context is a misnomer, similar to when it is used to identify a custodian. However, when the terms “full service” or “full spectrum” are used as part of the description, they become an understandable proxy for Named Fiduciary. Whatever the descriptive term one chooses to ascribe to the primary fiduciary decision maker, that role will always “cover the full spectrum of administrative and investment duties of fiduciaries under ERISA.” In short, the full scope 3(21) fiduciary is THE Named Fiduciary; put another way, the Named Fiduciary is THE full scope 3(21) fiduciary.

An investment advisor is not, and never will be, the full scope 3(21) fiduciary unless the advisor’s name actually appears in plan documents as the Named Fiduciary with authority to hire, monitor, fire and replace service providers and other fiduciaries.

2. The Plan Administrator

The “Plan Administrator” of a qualified retirement plan is defined in section 3(16) of ERISA. The Plan Administrator should not be confused with a “Pension Administrator” or a “Third Party Administrator.”

The Plan Administrator has the following primary responsibilities:

  • Ensures all filings with the federal government (form 5500, etc.) are timely made;
  • Makes important disclosures to plan participants;
  • Hires plan service providers if no other fiduciary has that responsibility; and
  • Fulfills other responsibilities as set forth in plan documents.

ERISA sections 101, 102 and 103 describe the specific fiduciary responsibilities and duties of the Plan Administrator. As a practical matter, the plan sponsor will normally reserve these functions of the Plan Administrator for itself. But in some cases, a plan sponsor may appoint an independent fiduciary to serve as the ERISA section 3(16) Plan Administrator. Sometimes a federal court may appoint an independent person to serve as the Plan Administrator of a plan. In any event, the responsibilities and duties of the Plan Administrator are fiduciary in nature.

3. The Trustee

ERISA sections 403(a) and 403(b) describe the duties of the “Trustee.” The Trustee is a person or group of persons recognized as having exclusive authority and discretion over the management and control of plan assets; a subset of the overarching duty to control, manage and administer the plan. In other words, the responsibilities of the Trustee are specific and distinct from the responsibilities of the Named Fiduciary who has the duty to control, manage and administer the plan, although managing plan assets is also inherent in managing the plan. Therefore, it is not uncommon to see the Named Fiduciary also simultaneously serving as the Trustee.

Unlike the full scope powers of the Named Fiduciary, the Trustee possesses a specific scope of delegated responsibility. (People sometimes refer mistakenly to a custodian as the “Trustee,” but in the context of ERISA, the Trustee is the person that has responsibility and discretion for managing trust assets.)

Where the Trustee is a separate person or persons from that of the Named Fiduciary, the Trustee is accountable to, and monitored by, the Named Fiduciary. A Trustee can be a “directed Trustee,” meaning that it must take directions from a fiduciary with a higher level of authority. For example, the Named Fiduciary (i.e., the full scope/full service/full spectrum/full discretionary or whatever one wants to call the 3(21) fiduciary) could direct the Trustee to perform certain functions, or it could even replace the Trustee with another. Such a replacement may require changes to plan documentation, requiring plan sponsor involvement.

It is also possible for the full scope 3(21) fiduciary to appoint an ERISA section 3(38)-defined “Investment Manager” that will provide directions to the Trustee. In the absence of an ERISA section 3(38) fiduciary, the Trustee will generally retain its exclusive authority and discretion over plan assets until revoked by the Named Fiduciary. It is even possible for the Named Fiduciary to retain Trustee responsibilities, thereby serving as both Named Fiduciary and Trustee, which appears to be the fiduciary structure described in the white paper referenced previously.

4. The 3(38) Investment Manager

ERISA section 3(38) defines the “Investment Manager” as a fiduciary with full discretionary powers for selecting, monitoring and (if necessary) replacing the investment options (i.e., trust assets) in a qualified retirement plan. When appointed by an authorized fiduciary (e.g., the Named Fiduciary), the 3(38) takes an ascendant role over the Trustee. The Trustee then becomes “directed” by the ERISA section 3(38) Investment Manager. The 3(38) fiduciary is appointed, as noted, and monitored by the Named Fiduciary (or the full scope 3(21) fiduciary).

The 3(38) Investment Manager may hire and monitor other service providers relevant to its scope of responsibility. For example, the 3(38) will monitor fund managers (and replace them if prudent to do so), custodians and others. In such cases, it has the power and the duty to replace such service providers as it deems necessary and appropriate in its sole discretion.

The 3(38) fiduciary must also ensure that the objectives of the plan’s portfolios are being met, with all the attendant responsibilities associated therewith.

5. The Investment Advisor

The investment advisor is not a term ERISA defines in the same manner as the aforementioned fiduciaries. An investment advisor to a qualified retirement plan usually does not have discretion over plan assets per se, but may exercise a certain level of influence and control over the operation of the plan. In other words, the investment advisor may not have explicit discretionary authority over the operation of a plan, but may exercise effective discretion through its influence upon others. That influence could be referred to as implicit discretion. At a minimum, the investment advisor must meet a fiduciary standard of care and, like all fiduciaries under ERISA, bears a duty of loyalty to the plan and plan participants which requires the advisor to:

a. Put the plan participants’ best interests first;
b. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
c. Not mislead plan sponsors or plan participants, but provide conspicuous, full and fair disclosure of all material facts;
d. Avoid conflicts of interest; and
e. Fully disclose and fairly manage, in the plan participants’ favor, unavoidable conflicts.

The investment advisor to a plan is always a limited scope section 3(21) fiduciary except when it is appointed as an ERISA section 3(38) Investment Manager. For example, the investment advisor does not replace the Trustee, or act with unilateral discretion with respect to the trust assets in a plan portfolio. It does not have the authority to establish its own fees or the fees paid to other fiduciaries. The investment advisor can only propose fees that may (or may not) be approved by a higher authority that’s described in the plan documents. Nor does it have responsibility to retain and pay legal counsel, auditors, consultants or other service providers on behalf of the plan generally. Those responsibilities normally are retained by the Named Fiduciary or Plan Administrator. If the investment advisor does not act in a 3(38) capacity, it will always be a limited scope 3(21).

The primary difference between a limited scope 3(21) investment advisor fiduciary and a 3(38) Investment Manager fiduciary is true explicit ERISA “discretion.” Investment advisors give advice and recommendations freely to plan sponsors who may choose to accept or reject it. Since a limited scope investment advisor has no discretion within the context of ERISA, though, they bear little or no liability for the consequences of their advice. This truly limits the role and value of a 3(21) investment advisor to plan sponsors in the fiduciary context of ERISA. On the other hand, a 3(38) (or the Trustee in the absence of a 3(38)) possesses true authority to make decisions at their discretion and with prudent judgment.

The difference between an investment advisor and a 3(38) can be described as the difference between someone in the back seat (i.e., the investment advisor) of a car giving directions to the driver (i.e., the plan sponsor) and someone who has the keys and actually has the responsibility to drive the car (i.e., the 3(38) fiduciary). Big difference! In my experience, the plan sponsor and Named Fiduciary wants someone to drive the car and be accountable for getting the passengers to their destination safely and efficiently. It’s easy to know that plan sponsors want an investment professional that is legally accountable to them and plan participants for fiduciary decisions that have real accountability. Just ask them.

6. Other Fiduciaries

Others fiduciaries include members of committees that could be appointed by the board of directors of the plan sponsor or the Named Fiduciary as well as others that may be acting in some fiduciary capacity under ERISA due to their actions. Although rare in practice, committee members may collectively serve as the Named Fiduciary and/or the Trustee. More commonly, however, committee members serve as a council, and report to the Named Fiduciary and Trustee on a regular basis. The investment advisor to a plan may participate as a member of a committee. The ERISA section 3(38) fiduciary may attend committee meetings, but a committee cannot dictate decisions to the 3(38).

A committee may be charged with monitoring other fiduciaries such as the investment advisor, the 3(38) fiduciary, the Trustee or even the Named Fiduciary. Monitoring a fiduciary with full discretionary authority, however, does not give the committee discretionary authority greater than that of the Named Fiduciary. Rather, monitoring is simply a prudent way to hold all fiduciaries accountable, regardless of the scope of their authority and discretion.


Expert professional independent fiduciaries understand how all of these fiduciary responsibilities work together on a day-to-day basis. After all, that is why plan sponsors retain them. Fiduciary experts do more than talk about the concepts of fiduciary responsibility; they live them each and every day in order to deliver their benefits to plan sponsors and plan participants. From many years of serving as an independent Named Fiduciary, I can attest that the best possible result for both sponsors and participants is to appoint a full scope ERISA section 3(21) fiduciary (i.e., the Named Fiduciary) which, in turn, appoints an ERISA section 3(38) fiduciary. This 3(21)/3(38) structure enables professional fiduciaries to take appropriate action when necessary and lower a plan’s cost structure below that of the prevailing market. It also gives plan sponsors a professional third-party to be held accountable for the prudent management of a plan. Appointing a limited scope 3(21) investment advisor may, however, adequately serve the interests of plan sponsor and plan participants in some cases.

In all instances, the plan sponsor retains the authority to remove and replace any fiduciary, even if has delegated all day-to-day responsibilities to others.

The terms “full scope,” or “full spectrum,” or “full discretion” are often used interchangeably to explain the depth and breadth of fiduciary authority and discretion under ERISA. I have chosen to describe those fiduciaries with the authority and discretion to perform all functions in a plan, whether such functions are delegated to other fiduciaries or not, as “full scope 3(21) fiduciaries” but any of these other terms are perfectly acceptable as well.

The fiduciary profession is an honorable and rewarding one. The roles and responsibilities undertaken by every fiduciary are important and valuable. Yet their true value must be conveyed to plan sponsors accurately in order to (a) fulfill statutory requirements prudently and (b) avoid creating frustration and confusion that comes from scrambled fiduciary messages.

A Few Things You Can’t Afford To Do

February 10th, 2011 | Comments Off on A Few Things You Can’t Afford To Do | Posted in Uncategorized

There are many reasons people make mistakes with money – a lack of knowledge or confidence, inattention, relying of the advice of friends rather than professionals. Here are some all-too-common money errors to avoid.

Putting off financial planning. Procrastination does not help you save for retirement, and it will not help you reduce your taxes or transfer money to your heirs. Delaying necessary financial planning can be perilous.

Putting all your eggs in one basket. Spread your assets across multiple investments, and you help to insulate them against the effects of economic ups and downs.

Buying more home than you can afford. Interest-only loans, option adjustable-rate mortgages (option ARMs) and lease purchases have tantalized many couples and families with small nest eggs, modest salaries and credit blemishes into taking on much more liability than they can bear. This year, foreclosures have skyrocketed nationally.

Making impulsive or emotional money decisions. A decision that feels good (or exciting) may not be appropriate for you financially. Avoid spur-of-the-moment financial choices, and the influences that may trigger them.

Living above your means. In the acclaimed book The Millionaire Next Door, authors Thomas Stanley and William Danko found that most millionaires drive used American cars and shun a champagne-and-caviar lifestyle. It is the middle class that is generally seduced by big-debt, big-ticket luxury items … sometimes all the way into bankruptcy.

Avoiding all risk. Caution is good, but being extremely risk-averse (for example, refraining from investment and just putting your money in an FDIC-insured bank account) may cost you in terms of the growth of your retirement savings and assets.

The Annual Financial Checkup

February 10th, 2011 | Comments Off on The Annual Financial Checkup | Posted in Financial News

Don’t ignore it; look forward to the chance to get things in order.

Here’s the scenario … you get a card in the mail, one of those little reminders that tells you it’s time for your annual financial checkup. Your reaction: I’ll take care of that later. Here’s why you should look forward to it.

Why do I need an annual review? Because things change, and during the course of the last 12 months, you may have … changed jobs, made major purchases, welcomed a new child, retired, bought or sold a residence, decided upon new goals. These developments can change your financial objectives.

Also, it is just sensible to measure your financial progress. If you are not making progress in accumulating assets, or if you are assuming too much risk as a result of your current portfolio or financial decisions, it’s time for change. The annual review is a “deep breath” where you can get away from daily distractions and think clearly about financial planning.

A chance to … stop putting it off. Imagine just letting your investments go for five or ten years, assuming that they’re doing okay while you wonder what the quarterly statements mean. Imagine being a few years from retirement only to find you have less than a year’s salary in savings. Imagine passing away and leaving unresolved money issues for your loved ones, or subjecting them to a contentious probate process. These scenarios are all too real; people run to financial advisors for help with them every day. If they had only reviewed what was happening with their lives financially, they could have planned to avoid these issues in advance. Putting things off can be dangerous.

Why not start the year right? More than just a start of a new year, but an ideal time to take a look under the hood financially. During your annual review, you can estimate your net worth, and also possibly learn about any tax changes that might affect your investments, business or estate. It’s also a good time to make voluntary IRA contributions, and get college funding and financial aid applications underway.

Hopefully, you have a qualified financial advisor who you have an existing relationship with. If you don’t, contact one today. Financial planning is not an event you do once in your lifetime. Financial planning should be a priority for you – it can help you manage your money, and allow you to plan for your goals and for the lifestyle you want for the future.

Monthly Economic Update

February 10th, 2011 | Comments Off on Monthly Economic Update | Posted in Monthly Economic Update

Flu Protection

February 10th, 2011 | Comments Off on Flu Protection | Posted in Uncategorized

Flu is a serious contagious disease that can lead to hospitalization and even death. In 2009–2010, a new and very different flu virus (called 2009 H1N1) spread worldwide causing the first flu pandemic in more than 40 years. Flu is unpredictable, but the Centers for Disease Control and Prevention (CDC) expects the 2009 H1N1 virus to spread this upcoming season along with other seasonal flu viruses.

CDC urges you to take the following actions to protect yourself and others from influenza (the flu):


Take time to get a flu vaccine.

   • CDC recommends a yearly flu vaccine as the first and most important step in
     protecting against flu viruses.

   • While there are many different flu viruses, the flu vaccine protects against the
     three viruses that research suggests will be most common.

   • The 2010-2011 flu vaccine will protect against an influenza A H3N2 virus, an
     influenza B virus and the 2009 H1N1 virus that caused so much illness last

   • Everyone 6 months of age and older should get vaccinated against the flu as soon as the
     2010-2011 season vaccine is available.

   • People at high risk of serious flu complications include young children, pregnant women,
     people with chronic health conditions like asthma, diabetes or heart and lung disease and
     people 65 years and older.

   • Vaccination of high risk persons is especially important to decrease their risk of severe flu

   • Vaccination also is important for health care workers, and other people who live with or care
     for high risk people to keep from spreading flu to high risk people.

   • Children younger than 6 months are at high risk of serious flu illness, but are too young to be
     vaccinated. People who care for them should be vaccinated instead.


Take everyday preventive actions to stop the spread of germs.

   • Cover your nose and mouth with a tissue when you cough or sneeze. Throw
     tissue in the trash after you use it.

   • Wash your hands often with soap and water. If soap and water are not
     available, use an alcohol-based hand rub.*

   • Avoid touching your eyes, nose and mouth. Germs spread this way.

   • Try to avoid close contact with sick people.

   • If you are sick with flu–like illness, CDC recommends that you stay home for at least 24 hours
     after your fever is gone except to get medical care or for other necessities. (Your fever should
     be gone without the use of a fever-reducing medicine.)

   • While sick, limit contact with others as much as possible to keep from infecting them.


Take flu antiviral drugs if your doctor prescribes them.

   • If you get the flu, antiviral drugs can treat your illness.

   • Antiviral drugs are different from antibiotics. They are prescription medicines
     (pills, liquid or an inhaled powder) and are not available over-the-counter.

   • Antiviral drugs can make illness milder and shorten the time you are sick.
     They may also prevent serious flu complications.

   • It’s very important that antiviral drugs be used early (within the first 2 days of
     symptoms) to treat people who are very sick (such as those who are hospitalized) or people
     who are sick with flu symptoms and who are at increased risk of severe flu illness, such as
     pregnant women, young children, people 65 and older and people with certain chronic health

   • Flu-like symptoms include fever, cough, sore throat, runny or stuffy nose, body aches,
     headache, chills and fatigue. Some people may also have vomiting and diarrhea. People may
     be infected with the flu, and have respiratory symptoms without a fever.

Visit CDC’s website to find out what to do if you get sick with the flu and how to care for someone at home who is sick with the flu.

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NRSP Intro

February 10th, 2011 | Comments Off on NRSP Intro | Posted in Videos

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