Thursday, December 31, 2009

What will 2010 Bring?

2010 will be the year of stabilization. A year where, if you have a job, you will probably still be working at the beginning of 2011 and if you are not, you may find employment; one where if you are prudent (and by that I mean not-so-conservative but cautious), you will find the equity markets still performing better (but not better than expected); one where we have learned lessons that should not be soon forgotten.

Read the full article from Paul Petillo, Managing Editor of Target and a fellow Boomerhere.

Thursday, December 17, 2009

The IRA Option

Some of us may be entering a new job that does not have a 401k or has one that you do not feel is as good as the one you just left. And your employer won't let you keep your money where it was. What to do?

Rolling your 401k into an IRA is another matter. This is for the investor who has some concept of what lies before them. If I were to guess, this type of investor has had an active roll in how their former employer's 401k was allocated. They paid close attention to diversity, perhaps even following conventional wisdom of limiting risk as they aged.

For this retirement investor, the IRA rollover is viable option. It allows closer control of how this money is invested with a variety of considerations weighed with each decision. Not only will this investor spread their allocation over a number of funds, they will do so with an eye on fees and expenses, a consideration of performance of the fund under both good and adverse conditions, and clearheaded understanding of the risks involved.

IRAs cannot be borrowed against and restrict a penalty-free withdrawal of money before 59 1/2 years old. But the choices are the primary attraction. This investor knows, and you should as well, the risks of building a successful IRA portfolio also increase. The biggest concern is investments that crossover.

What 401k plans are supposed to do is provide the investor with a fiduciary responsibility to provide the right tools for their employees. You, as an IRA investor are on your own.

You must monitor the funds you invested in for a change in investment strategy, style drift (when a fund manager invests on the edges of what s/he was hired to do; such as when they invest in large-caps when mid-caps are the focus), and an increase in turnover (a cost for trading repeatedly that the shareholder pays for directly, often done in an attempt to boost returns in the short-term, like at the quarter's end). You bear the burden of this responsibility to your future.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Paul Petillo is the Managing Editor of and a fellow Boomer.

Tuesday, December 15, 2009

Leaving a 401k behind?

Job separation can come for any number of reasons. But a late in life job change comes with additional considerations. What to do with that 401k you left behind?

Keeping the money in a 401k has its advantages. For older workers, the ability to begin disbursement at age 55 is an attractive plus. Although it is generally ill-advised under almost every circumstance, keeping the money in the 401k retains your ability to borrow from the plan. Some of us will consider keeping this option open. It's an option albeit, not a good one.

Generally, the fees are better in a 401k. Institutions may get a much better deal from the plan sponsor and consideration of this is important in the rollover decision. A much larger plan may come with more options or simply less expensive ones. Fees are an important aspect of total return and a worthwhile item to focus on when making any decision to move.

But you may not have an option if the balance is less than $5,000. This means you are faced with the choice of taking the cash in the account (along with the 20% the account must hold for income taxes and the 10% penalty). The scariest statistic, two-thirds of you take the money and pay those hefty penalties.

The terms of disbursement are spelled out when you leave the job in the 402(f) notice. This explains your options for handling a 401k disbursement. Even if you want to stay, your old employer really doesn't want the continued burden.

Bottom Line: Once you receive that 402(f), begin to research your options. And even if you think that money will come in handy, never take the cash.

Next: rolling to an IRA.

Paul Petillo is the Managing Editor of and a fellow Boomer

Thursday, December 10, 2009

A Look at the Best 401K plans

In a previous post, we introduced a rating system for your 401(k) offered by Brightscope. Now, they are offering a look at the best 401(k) plans.

Does your plan work as hard as you do?

The Top 30 401(k) plans as rated by Brightscope.

Paul Petillo is the Managing Editor of

Wednesday, December 9, 2009

Investing is Never Simple

Mutual fund investing should be a simple process. It should be straightforward and easy to understand. Unfortunately, once we get involved, we bring our own set of behaviors to the process. And Boomers as a rule, should know better.

In our first discussion about performance comparisons for mutual funds, we looked at the downside of simply comparing side-by-side an actively managed fund with one of the indexes that are published. These indexes span a wide variety of categories in order to help investors understand how the broader market has done in relation to the fund they own.

Which leads us to a discussion about fees.

Paul Petillo is the Managing Editor of and a fellow Boomer

Tuesday, December 8, 2009

Not too Late: Dividends, Boomers and Growing Wealth

Boomers should pay attention. As our portfolios age, common wisdom is to transfer our wealth to more conservative investments. Nothing is more conservative in the world of equities than companies who pay dividends. Not only is the return historically better the companies who pay, such as those in the Dow offer older and more stable investments allowing you to skip the middle man and buy directly.

Dividends offer the investor an opportunity to not only own a share of a company but also to share directly in that company's profits. As you may recall, when a company makes a profit, they have numerous options. Many businesses simply reinvest the money into the company. Some buyback shares with the profits or reduce their debt. But older, more established companies distribute those profits among shareholders.

Some even offer a dividend reinvestment plan or DRIP. And many of these plans allow you to receive the dividend in the form of more stock. These plans are an inexpensive way to increase your portfolio's value and do so without much in the way of effort on your part.

The best part of these types of plans is the cost. Not only is the purchase automated but buying stocks directly from the issuing company is also, in most cases, free of brokerage costs. Add to that, most companies allow you to begin the process with as little as $10. The automated feature of these plans also allows you to invest via automatic deduction from existing accounts you might own.

Involvement in this type of program allows you to purchase individual shares rather than taking a cash disbursement. This reinvestment can be set up in a variety of ways: full reinvestment (where any and all dividends are used to purchase more stock), partial reinvestment (designates how much of the dividend goes to buying additional shares and how much you want to receive in cash), or as a cash payment.

To enroll, you need to own at least one share in your name (if you are buying them for a minor, your name must be entered as the custodian). You can do this using an online brokerage or similar discount broker.

There are over 300 companies listed on the S&P 500 list that offer these sorts of options. All of the companies on the Dow Jones 30 offer either a direct stock purchase (DSP) which eliminates the need for a broker or a DRIP, which requires ownership of at least one share to begin the reinvestment plan.

Last week, Gina asked me what would an investor do with $25. Although I suggested opening an IRA directly with a mutual fund company (in large part because at least there are tax advantages in doing so), that same amount, invested every week could generate enormous amounts of profit for the investor as well. Keep in mind dividend payments create a tax event (although some allow them to be tucked inside your IRA).

Yet, considering the fact that dividend paying stocks generally outperform the overall market by 3%, this is an opportunity that has so much potential, you shouldn't pass it up.

Below is a list of the Dow 30 companies with dividends, direct stock purchase plans or dividend reinvestment plans.

3M Company (MMM) DRIP
Alcoa Inc. (AA) DRIP
American Express Co. (AXP) DSP
Bank of America Corp. (BAC) DSP
Boeing Co. (BA) DRIP
Caterpillar, Inc. (CAT) DSP
Chevron Corp. (CVX) DSP
Citigroup Inc. (C)
Coca-Cola Co. (KO) DRIP
DuPont (E.I.) deNemours (DD) DRIP
Exxon Mobil Corp. (XOM) DSP
General Electric Co. (GE) DSP
General Motors (GM)
Hewlett-Packard Co. (HPQ) DRIP
Home Depot, Inc. (HD) DSP
Intel Corp. (INTC) DRIP
International Bus. Mach. (IBM) DSP
J.P. Morgan Chase & Co. (JPM) DRIP
Johnson & Johnson (JNJ) DRIP
Kraft Foods Inc. Cl A (KFT) DRIP
McDonalds Corp. (MCD) DSP
Merck & Co. Inc. (MRK) DSP
Microsoft Corp. (MSFT) DRIP
Pfizer Inc. (PFE) DSP
Procter & Gamble Co. (PG) DSP
United Technologies Corp. (UTX) DRIP
Verizon Communications Inc. (VZ) DRIP
Wal-Mart Stores, Inc. (WMT) DSP
Walt Disney Co. (DIS) DSP

Paul Petillo is the Managing Editor of and a regular contributor to MomsMakingaMillion Talk Radio. He is also a fellow Boomer.

Sunday, December 6, 2009

Small Comfort

This past Friday, we received some great unemployment numbers. They are showing a slight increase in jobs. That's small comfort for the enormous group of folks who are still unemployed and for Boomers who may have seen a late-in-the-game brush with unemployment. And that may have strained our personal economies.

With over ten percent of us out of work, another eight percent of us no longer bothering and an estimated twenty percent of us contemplating the possibility that we might lose everything we have worked so hard for, the subject of who owns what as we consider our options in an economy that doesn't seem to be recovering fast enough to suit most of, the question of your 401(k) as part of a bankruptcy is worth asking.

The choice of bankruptcy is always the last option. When you consider this option, you will find your assets under the control of the bankruptcy estate while your case is pending. You still own these assets. Your home is protected providing you can make the payments and if your home is worth more than your mortgage, the bankruptcy estate will exclude up to $37,500 in equity from consideration. The same applies to any equity you might have in your car.

The concept for exempting these two items is relatively straightforward. How could you possibly hope to recover from bankruptcy if you were stripped of these items? Understanding the need for shelter and transportation is important. But does the most valuable asset protecting your future fall under the same consideration?

Although you will need a bankruptcy attorney to guide you through the maze of rules, the focus of such an action is to come to some sort of agreement with your creditors on how you will repay what you owe. In some instances, it might be the forgiveness of your interest obligation in favor of satisfying the debt. Repayments plans and schedules are worked out and as long as you follow those obligations, you can remain under the roof that you own and be able to get to and from work.

The question of your 401(k) however is not so clear-cut. And the answer depends on ERISA qualifications. Section 541(c)(2) of the Bankruptcy Code. Section 541(c)(2) provides: “A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable law is enforceable in a case under the Bankruptcy Code.”

This means that your 401(k) is safe from the actions of bankruptcy court and cannot be considered when determining the value of the estate. If you plan falls under ERISA protection, and generally this qualification applies to most larger company plans, your assets are safe. The exception however, effects the smaller business owner.

Among the exceptions to this rule is a retirement plans that has only one participant, such as single employee corporate plans, and some other plans originating in self employment. These plans may be property of the estate. They may be vulnerable to creditors. When you consider the number of small businesses affected by the economic downturn, this is an important exemption.

For those of you who do have a plan that is exempt, the ownership of this property has found its way to the US Appeals Court. The question posed by the case dealt with the loan that was borrowed from a 401(k). Although the person was obligated to pay back the loan, the loan payment was questioned.

Chapter 7 bankruptcy subjects the estate in question to a means test. This sorts out what is qualified and what is not in terms of "necessary expenses". The loan repayment to the 401(k) was challenged. The court, ruling in the case of Egjebjerg v. Anderson found that the repayment to the 401(k) was the same as a contribution to that person's plan. In other words, if you loan money to yourself, the repayment of that loan is not considered a debt under the law.

The plan has not right to sue for repayment of the 401(k) loan but can, according to the court, offset the loan against future benefits. But the court that while Chapter 7 proceedings did not cover the individual, Chapter 13 would consider the repayment as part of the debt owed. This subtle difference is important and makes the consideration of good representation a must for anyone considering such a drastic move.

It is important to consider all of your options before subjecting your finances to estate scrutiny. And secondly, borrowing from your 401(k) is still a bad idea. In a Chapter 7 proceeding, the losses to that important linger far into the future. And while Chapter 13, often referred to as the wage-earners plan, does allow for the repayment of that loan under the court's approved structure, the loss of earnings in the retirement plan will have lingering effects long after you emerge, finances revitalized.

Paul Petillo is the Managing Editor of and a fellow Boomer