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A Prime Time to Refinance

January 17th, 2012 | No Comments | Posted in Financial News

Interest rates on 15-year fixed mortgages are near record lows.

Mortgages have become even cheaper. This summer, economists and real estate industry analysts looked at skidding Treasury yields and wondered just how much further interest rates on home loans could fall. The answer: perhaps even further.

On November 17, interest rates on 15-year FRMs averaged just 3.31%. Rates on conventional 30-year home loans averaged 4.00%, and average rates for 5/1-year ARMs and 1-year ARMs were respectively at 2.97% and 2.98%.1

The yield on the 10-year note was just 2.01% on November 17, and it has been paltry all fall. We recently saw all-time lows of 3.26% for the 15-year fixed and 3.94% for the 30-year fixed (in Freddie Mac’s October 6 Primary Mortgage Market Survey).2,3

Those able to refinance are seizing the moment. If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.

Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi might not be worth it.

If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.

How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.4

In November, Cleveland Fed President Sandra Pianalto told Reuters she expects inflation to retreat from the current pace of about 3.5% to around 2% and stay at about 2% through the end of 2013. That kind of forecast doesn’t imply further easing (and the higher interest rates it would encourage). The Fed has left short-term interest rates near zero for about three years now, and has shifted $2.3 trillion into long-term Treasuries to help keep borrowing costs lower.5

Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. In August, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expected yields to end 2011 at 2.5%. Some fund managers and strategists felt that benchmark Treasury yields could end the year under 2.0%. If that holds true, rates on 30-year fixed mortgages would be in the vicinity of 3.6-4.2% circa New Year’s Eve.6

Interest rates will move significantly north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.

Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to us at PRIMESolutions Advisors. We can be reached at, 877-366-4015.

Citations
1 – www.freddiemac.com/pmms/ [11/18/11]
2 – www.reuters.com/article/2011/11/17/markets-treasuries-asia-idUSL3E7MH16O20111117 [11/17/11]
3 – www.usatoday.com/money/economy/housing/story/2011-11-17/Mortgage-rates/51266020/1 [11/17/11]
4 – www.nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
5 – www.reuters.com/article/2011/11/17/us-usa-fed-pianalto-idUSTRE7AG20F20111117 [11/17/11]
6 – online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]

Little Ways You Might Improve Your Financial Life

January 17th, 2012 | No Comments | Posted in Financial News

Some things to think about this year – and every year.

This is the year! Yes, you can make 2012 the year you alter your financial life for a better financial future. Let’s look at some steps you might think of taking with the goal of financial freedom in mind.

No, we’re not talking about those ridiculously obvious steps the usual articles recommend, like “write your goals down” and “set a budget”. Let’s go past the clichés and get into the real issues.

Look at your income source, your expenses and your debt. How do you earn income? If you earn it from one source, is there effectively a ceiling on it, or is there real potential for your income to rise in the next few years? Now look at your core living expenses, the ones you can’t avoid (such as a mortgage payment, car payment, etc.). Can any core expenses be reduced? Investing aside, you position yourself to gain ground financially when income rises, debt diminishes and expenses stay (relatively) the same.

Maybe you should pay your debt first, maybe not. If you are a business owner or a professional, for example, you’ll likely always have some debt. Your ultimate goal should be to build wealth – and you can plan to build wealth and minimize debt at the same time.

Some debt is “good” debt. A debt is “good” if it brings you income. If you buy a rental property, you’re paying a mortgage, but that’s considered a “good” debt because you’re getting passive income from the rent payments. Credit cards are “bad” debts.

If you’ll be carrying a debt for a while, put it to a test. Weigh the interest rate on that specific debt against your potential income growth rate and your potential investment returns over the term of the debt. If the interest rate on that debt looks like it will outpace your income growth and investment returns, then you should really think about paying that debt down fast, because you can’t afford that interest rate.

Of course, paying off your debts, paying down balances and restricting new debts all works toward improving your FICO score, another tool you can use in pursuit of financial freedom (we’re talking “good” debts).

Implement or refine an investment strategy. You shouldn’t refrain from investing, even when the negative bears are out. You’re not going to retire on the relatively small elective deferrals from your paycheck; you’re going retire on the interest that those accumulated assets earn over time, plus the power of compounding. Investing can also potentially bring you passive income. Consistent investing, this year and in years to come, has the potential to help you improve your financial life.

Manage the money you make on your way to financial freedom. It’s amusing: all these Internet gurus tell you they have a method to make you “financially free” or “debt free”, but few tell you how to manage the money you make. Their not-so-subtle message seems to be “succeed and live lavishly” – if you make it financially, you’ve earned the freedom to blow it all on cars, boats and luxuries.

This is a classic nouveau riche mistake. If you simply accumulate unmanaged assets, you have money just sitting there open to risk – inflation risk, market risk, even legal risks. Don’t forget taxes – while not technically a “risk”, they are a threat to your money. The greater your wealth, the more long-range potential you have to accomplish some profound things – provided your wealth is directed.

If you want to build more wealth this year or in the near future, don’t neglect the risk management strategy that could be instrumental in helping you retain it. Your after-tax return matters even more than your investment return, so risk management should be part of your overall financial picture.

Request professional guidance for the wealth you are growing. A good financial advisor will really help to educate you about the principles of wealth building. You can draw on that professional knowledge and guidance this year – and for years to come.

2012, The Year That Retirement Plan Sponsors Need To Make “Contact”

January 17th, 2012 | No Comments | Posted in Financial News

A “perfect storm” is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically. The term is also used to describe an actual phenomenon that results in an event of unusual magnitude.

As 2011 comes to a close, there will be a seismic change in the retirement plan industry. Fee disclosure to plan sponsors by their plan providers and fee disclosure to plan participants in 2012 will change how the retirement plan industry will operate. It will for the first time require plan providers and plan sponsors to disclose actual plan expenses whether they are paid directly or indirectly. In addition, there are other changes as well. By New Years, the Department of Labor (DOL) will finally implement regulations allowing for 401(k) advice to be provided to participants by plan providers. In addition, the DOL is still insistent on changing the definition of retirement plan fiduciary, which will affect the role of many retirement plan advisors. So with all these changes, you have a Perfect Storm for retirement plan sponsors.

Unfortunately like Captain Billy Tyne and the crew of the Andrea Gail, retirement plan sponsors aren’t prepared for the Perfect Storm. Unlike a nor’easter, these changes will bring a lot of good to the retirement plan industry. However, if plan sponsors don’t understand the changes and get prepared for it, they can certainly capsize and risk their plan to unwanted liability.

There has been a general apathy among retirement plan sponsors since they are unaware of the significance of sponsoring a retirement plan. Plan sponsors are generally unaware of their responsibilities that come with being a plan fiduciary. As plan fiduciaries, they are liable for any breaches of fiduciary duty. Too many plan sponsors assume they take on no liability role for hiring incompetent plan providers or by making their plan’s investments to be under a participant’s direction or not understanding as to how much their plan costs. Despite the assumption, they are wrong because the liability buck always stops with the plan sponsor and other plan fiduciaries such as the individual trustees.

Too many plan sponsors swear they pay nothing for administration while their plan is laden with high expenses. Too many plan sponsors don’t have a financial advisor on their plan and/or they don’t have an investment policy statement which is used to determine what investment options are offered under the plan. Too many plan sponsors rely on plan providers that are incompetent and put the plan at risk for disqualification or sanction from the Internal Revenue Service. Many plan sponsors who were unaware of their role, unfortunately became aware of it after it was too late. Plan sponsors have been sued for administrative errors, high plan expenses, and poor investment selection. Plan sponsors have even been sued for what class of shares of the specific mutual funds in the plan is offered. When there is a down stock market, plan participants need someone with deep pockets to blame and that is always going to be their employer. With great power comes great responsibility and it is incumbent on 401(K) plan sponsors to understand that responsibility.

Plan sponsors need to find quality plan providers like an ERISA attorney, a third party administrator (TPA), and a financial advisor to help guide them through this turbulent period that will require them to be more vigilant in their duties and more diligent in reviewing their plan providers. They always say that you are only as good as your team, so a plan sponsor is wise to surround themselves with the best team that they can find and afford. Being stuck with incompetent providers puts the plan sponsor at a risk because no matter what, the buck stops with the plan sponsor and the other plan fiduciaries such as the individual trustees.

They need to be aware that with fee disclosures being provided to them by their plan providers, that they will have significant responsibility in determining whether the plan expenses that they are currently paying are reasonable. The only way to determine whether fees are reasonable is to comparison shop the plan to other retirement plan providers. Simply taking the fee disclosures that they receive from their plan providers and putting it in the back of the drawer is not enough, plan sponsors have to read the disclosures, understand the services they get, and find out whether the price they are paying is reasonable for the services being offered. Plan sponsors should make sure plan fees are reasonable just based on the fact that in mid-2012, plan participants will get a disclosure of plan expenses as well. The last thing a plan sponsor needs is having their employees find out that the fees they are paying are excessive.

The new 401(k) advice regulations that are effective on December 27, 2011 are something that plan sponsors should take advantage of. The advice regulations end an interesting dilemma that most plan sponsors were unaware of. Until this regulation was implemented, plan providers such as financial advisors and mutual fund companies serving as TPAs were barred from providing financial advice to participants because the DOL believed it was a conflict of interest. Plan providers were only allowed to provide investment education, which was general information about the plan investment options, plan features, as well as educating plan participants on basic financial concepts. The reason why plan sponsors should either require their plan providers to offer investment advice or seek the services of a third party to do it is rather simple; it’s all about liability protection. They should make sure that all their plan participants have the opportunity to get investment education and advice because it will help plan participants make better informed investment decisions, which has the power of increasing retirement savings and decreasing the plan sponsor’s liability because happy plan participants rarely sue.

One of the interesting developments with the new financial advice regulations is the fact that any financial advisor that will offer advice will be called fiduciary advisors. Why so interesting? Well, the DOL has been trying to change the definition of retirement plan fiduciary for years. While the DOL tried to implement the rule change in 2011, much scorn from Wall Street and Congress had the DOL shelve the change. However, the DOL has stated they will try to change that again. Why should plan sponsors care? Well there are two groups of people who call themselves retirement plan financial advisors: registered investment advisors (RIAs) and stock brokers. Under the current rules, RIAs owe a fiduciary duty to the plans they work on and brokers do not. RIAs must put the needs of the plan in front of their own while brokers can sell financial products and services to the plan that benefits them more than the plan. The DOL’s change of the fiduciary definition would end that difference as brokers would become fiduciaries and would have to offer investments and services that do not benefit themselves at the expense of the Plan. If the DOL makes this change in 2012, brokers that work\ on retirement plans have three options: 1) become plan fiduciaries; 2) partner up with RIAs who will serve as fiduciaries while the brokers would serve in a non-fiduciary function; or 3) leave the retirement plan business altogether. Plan sponsors need to understand if their financial advisor is a plan fiduciary or not and if their financial advisor is a broker what the broker’s plans are if the DOL gets their way with the change of the fiduciary definition in 2012.

Plan sponsors who have neglected their plans for years will have to wake up from their self induced coma to understand that the changes that will be undergoing in the retirement plan industry are positive developments, but add a level of responsibility to them. Financial disclosure regulations will reveal plan expenses which are good, but adds more work to the plan sponsor because they have to make sure that their plan providers comply or they will be accused of committing a prohibited transaction. The new financial advice rules can be a positive development for the plan sponsors that will offer it, but may add pressure to those that don’t. A proposed change to the fiduciary definition will create a level playing field for all retirement plan financial advisors, but plan sponsors need to be aware of the role that their financial advisor currently has with the plan. They say that one person’s gold is another person’s trash. Positive change in the retirement plan industry can create opportunity for plan sponsors to improve their plans, but can increase the liability for the plan sponsors who don’t act. Every retirement plan sponsor needs to contact their plan providers and find out if their plan providers are ready for these changes and whether they can assist the plan sponsors get thorough these changes. If the plan providers aren’t up to the task, plan sponsors have the fiduciary duty to find the plan providers that are up to the task.

Taking care of a retirement plan is like taking care of a car. Like a car owner, plan sponsors need to provide constant maintenance or their retirement plan will end up like a jalopy and costing them more in liability in the long run.

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10 Basic Retirement Plan Concepts That Every Plan Sponsor Should Understand

January 17th, 2012 | No Comments | Posted in Financial News

Unless a company sponsoring a retirement plan is involved in the retirement plan industry, it is in the role of delegating much of their duties to retirement plan providers that may include third party administrators (TPAs), financial advisors, and ERISA attorneys. Despite the fact that retirement plan sponsors delegate much of their role, they are still ultimately responsible for what happens to the plan in their role as plan fiduciaries. This is why it is important that retirement plan sponsors know basic concepts about retirement plans, so they can understand their role and their liability.

Fiduciary: With great power, comes great responsibility, As plan fiduciaries, plan sponsors have great responsibility and potential liability to the plan. In addition to the plan sponsor, individuals can serve as fiduciaries as well. Using discretion in administering and managing a retirement plan or controlling the plan’s assets makes that person a plan fiduciary to the extent of that discretion or control. So, fiduciary status is based on the functions performed for the plan and not just based on a person’s title. A plan’s fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan’s administrative committee (if it has such a committee), and those who select committee officials. Attorneys, accountants, and actuaries generally are not fiduciaries when acting solely in their professional capacities. The key to determining whether an individual or an entity is a fiduciary is whether they are exercising discretion or control over the plan. As the current definition of fiduciary stands now, registered investment advisors are fiduciaries, stock brokers are not. The Department of Labor (DOL) has proposed a new definition that will include brokers as fiduciaries. Plan sponsors should understand that they are fiduciaries and must identify who else serves in that role for purposes of plan administration and as well as for issues of potential liability.

Fiduciary responsibility: Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: acting solely in the interest of plan participants; carrying out their duties prudently; following the plan documents; diversifying plan investments; and paying only reasonable plan expenses. Fiduciaries that do not follow these responsibilities will have breached their fiduciary duty and may be personally liable to restore any losses incurred by the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. What plan sponsors should really be aware of is that ultimately, the buck stops with them. That means that regardless of the incompetence of the providers they chose, they are ultimately responsible for any problems resulting in the administration of their plan. No ifs, ands, or buts. A plan sponsor can never fully eliminate all of their fiduciary responsibility, even if they hire an ERISA §3(38) fiduciary to assume the responsibility of managing the process of selecting and overseeing plan investments.

Section 408(b)(2) Regulation: The DOL regulation, which will be implemented in April 2012, which will require plan providers to reveal to the plan sponsor direct and indirect compensation that they receive from a plan. Plan sponsors need to be aware that receiving the disclosures is not enough; they must determine whether these fees being charges to administer the plan are reasonable. Paying excessive plan expenses is a breach of a fiduciary’s duty of prudence. So the only way to actually determine whether costs are reasonable is to shop the plan around either using a retirement plan consultant, ERISA attorneys, or by contacting competing plan providers.

Section 404(a)(5) Regulation. Plan sponsors are not the only ones who will finally get the costs of plan administration. Under this new DOL regulation, participants will finally get a disclosure of fees charges against their 401(k) account in June 2012. The total cost in dollars being assessed to plan participants every quarter will be listed clearly on the participant’s quarterly account statement. For plan sponsors unaware of the total costs associated with their retirement plan, this may result in participant complaints and questions about improved or lower cost retirement plan options. So not only finding the cost of a plan’s administration an issue of fiduciary liability, it can also be a human resources disaster.

Defined Benefit Plan: A defined benefit plan promises a specified monthly benefit at retirement, which is based on a participant’s salary, length of employment, and age, using an actuarial formula. While they have fallen out of favor amonglarger employers because of governmental regulation and the proliferation of 401(k) plans, they are still highly attractive for sole proprietors and small businesses.

Cash Balance Plan: A cash balance plan is a defined benefit plan (they are not hybrid plans as some may claim) that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance (which is actually hypothetical). Working with a 401(k) plan, cash balance plans are more flexible in plan design than traditional defined benefit plans and may be a great fit for professional service firms as well as any company willing to pay 5% to 7% for their staff, which will lead to larger contributions for highly compensated employees.

Defined Contribution Plan: Unlike a defined benefit plan, a defined contribution plan does not promise a specified retirement benefit. It offers a defined contribution allocation formula which allocates contributions to a participant’s account, where the participant will bear the gains and losses from the investments in their account (whether or not they direct their investment). Profit sharing plans are a type of a defined contribution plan. A 401(k) plan is a profit sharing plan with a cash or deferred arrangement. No profits are needed to make a profit sharing contribution.

Form 5500. The annual reporting return to be filed electronically for all plans subjects to ERISA. Forms 5500 must generally be filed by the last day of the seventh month following the end of the plan year, unless an extension has been granted (July 31 for a calendar year plan). Retirement plans with more than 100 participants (except for those that fall under the 80/120 rules) must also include an audit performed by an independent auditing/accounting firm. Failure to file a Form 5500 can result in huge penalties unless the plan sponsor corrects the problem thorough the DOL’s voluntary compliance program.

ERISA §404(c): The provision in ERISA that limits a plan sponsor’s liability in a participant directed investment retirement plan. Many plan sponsors assume that offering plan participants some mutual funds to invest in and Morningstar profiles exempted plan sponsors from liability. Section 404(c) protection requires a process. Plan sponsors need an investment policy statement (IPS) which details why particular plan investments were selected. They must review and replace investment options with their financial advisors at least annually based on the terms of the IPS and meaningful education must be given to participants. All decision making in this §404(c) process should be documented.

The myth of free administration: There is no such thing as a free lunch of free 401(k) administration. Whether a plan sponsor is using an insurance company platform or large enough to deal directly with mutual fund companies, they are paying for administration whether they believe or not. Whether the administration fees are considered “free” or low, the provider makes up the low cost through wrap fees (hidden fees added to mutual funds by insurance providers) or 12b1/revenue sharing fees (that mutual fund companies wouldn’t have to share in a bundled environment.

These are just some of the basic concepts of retirement plan that plan sponsors need to understand. If you have any questions, ask your local TPA or contacts yours truly. I never charge a plan sponsor for a phone call because helping plan sponsors is one important way in improving retirement plans.

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January Economic Update

January 17th, 2012 | No Comments | Posted in Monthly Economic Update

Smartphone, Dumb Security

January 17th, 2012 | No Comments | Posted in Lifestyle

So your phone can edit a video, but can it protect your data? How wonderful that you can shoot and email a video of your baby’s first steps, right from the comfort of your smartphone. But when that phone is lost or stolen, it’s more than just your sweet memories that are at risk—it’s also your online banking passwords, confidential work documents, even the last year’s worth of texts and emails. Be smarter about your smartphone today.

So your phone can edit a video, but can it protect your data?

Sure, smartphones make communication easier. Part central computer, part electronic valet, they make troves of information—from War and Peace to your grandma’s birthday to a restaurant reservation—available at the touch of a fingertip. These mighty minis even have the power to change lives: Smartphone data has been used to clear accused people of serious crimes, and police have used iPhone geomapping to track down stolen cars with the device still in them. Smartphones also keep users in touch with friends, relatives—and, unfortunately, hackers and thieves.

What does all this mean to the average consumer or business user? Simple: It’s time to stop thinking of these petite but powerful machines as phones and start protecting them like computers.

There are various security options—and weaknesses—in the most popular smartphone models and apps, but a few basic tips and tricks can immediately up your phone security game.

First is simple common sense. What information is on your smartphone? If you access a Gmail account or online banking, are the passwords saved into the apps? Do you read sensitive business documents on your phone? Do you have images of your Social Security card or passport? Such files can be a boon if you lose physical documents overseas, but what if your phone is stolen? And those falsely accused folks cleared of criminal charges? It was erased data that saved them. An expert (good guy or bad) can recover voicemails, texts, emails—any kind of key swipe—from as long as 12 months ago.

The first step to securing a smartphone is to make a physical list—pen and paper, people—of all accounts and documents (or types of documents) you access on your phone. Remove anything nonessential—do you really need that client roster loaded with billing info?—and cross it off the list. Put that list in a safe place, such as a home office safe or safety deposit box. If your phone is lost or stolen, you’ll be glad you have it.

Then remove all stored login names and passwords (some of which may have been autosaved by your phone) for apps and web pages. The extra four seconds you spend manually entering that information at each login will save hours of headache if the phone is compromised.

The second line of defense is encryption, which essentially scrambles the data on your phone’s drive, only allowing access if the correct code is entered. It’s more sophisticated than a standard phone lock, because the data on the actual drive is changed—thieves can’t simply pull the drive or run a password breaker to access it. (Even still, you should always have your standard phone lock ON.) Most smartphone operating systems—iPhone, BlackBerry, Android—offer encryption options.

Your third step is third-party security apps. Lookout Mobile Security is a good starting point for Android, BlackBerry and Windows Mobile users. The free package includes an antivirus application, automated data backup and a device tracker. iPhone users can pay for MobileMe. But don’t let tracking programs fool you: They all need to be activated and running in the foreground to work. If your phone is off or the app isn’t running when the phone goes missing, it’s not much good. (And surely a smart thief knows about the $20 signal-blocking bag that stymies any tracking app….)

The last, and perhaps most important, element of securing your smartphone is smart use—awareness. Hackers have long been able to intercept information over open Wi-Fi networks. Even the strongest protection, WPA2, has exploitable security flaws. So unless you’re on a trusted network, don’t enter any personal information or check important accounts. That free airport wireless network? You’d be foolish to enter your email, social network or banking information over that connection. You just don’t know who’s watching.

Someone stole your smartphone—now what?

   • Find that pen-and-paper list.

   • For all accounts, websites and documents on that phone, change the password immediately
     —Gmail, Facebook, Dropbox and even your secure work connection. With reverse phone
     lookups, anyone with five bucks and your cell phone number can find more personal
     information, from addresses to tax and real estate records.

   • Consider a credit- or fraud-monitoring service. A dollar spent on prevention can save
     hundreds on a cure.

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Making New Year’s Resolutions Stick

January 17th, 2012 | No Comments | Posted in Lifestyle



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