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Beyend 401 small buisness owners - Jean D.

Jean.D Beyend 401 small buisness owners - Wiley & sons , 2004. - 274 p.
ISBN 0-471-27268
Download (direct link): beyond401korsmallbusinessowners2004.pdf
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Tips to Avoid Common Mistakes in Retirement Plans 165
More information about retirement solutions for business owners can be found in Merrill Lynch’s Meeting Your Business Retirement Plan Needs.
Here are three common mistakes that business owners make:
1. Unrealistic expectations
When the market was achieving double-digit returns in the late 1990s, almost every investment produced a positive return. This was followed by a severe decline in the market and high-profile corporate bankruptcies. Investment expectations should not be driven by the extremes of the market. Before choosing particular investments, it is important to work through the development of a plan. It should focus on achieving realistic returns and reducing risk through (1) proper asset allocation— investing in equities, fixed income, and cash; and (2) diversification across industry sectors, market capitalization, and investment styles.
2. “Do it yourselfers”
Some business owners want to “do it themselves.” While there are business owners who understand and are committed to fulfilling their fiduciary responsibilities, including those under ERISA, most are simply too busy running their businesses to dedicate attention to all the details. Problems arise when business owners do not establish a prudent written investment policy, set up an investment committee, educate employees, keep adequate records, review performance, and make adjustments consistent with their investment policy. Business owners who do it themselves must devote significant efforts to staying up to date with changes in the market as well as the laws and regulations related to retirement plans. This means reviewing the plan and investments on a regular—at least, quarterly—basis.
(continued)
166 Tips to Avoid Common Mistakes in Retirement Plans
3. Not understanding “asset-based” fees
Asset-based administrative fees (a percentage of the funds under management) can seem to be low cost in the early days, but the costs escalate as the assets in the plan grow. How the fees are allocated among plan participants is another important consideration. Business owners need to be aware of the various implications of asset-based fees on their plan’s portfolio.
Bob recommends that business owners take the time to develop a realistic plan to achieve their goals. An experienced financial advisor can help design and implement a plan that reduces risk and enables the business owner to stay “on top” of the plan.
12
FINANCIAL HEALTH-CHECK: IS YOUR PLAN ON TRACK TO ACHIEVE YOUR GOALS?
Times change. The law changes. What made sense a couple of years ago may no longer be the best choice for you and your business. Recent changes in legislation have created many new opportunities for small business owners. For example, the recent advent of the “Single K” has made 401(k) plans a much more attractive option for many small businesses. A financial “health-check” can help assure that your plan is up to date and on track to achieve your goals.
According to Christopher J. (Chris) Williams, Senior Financial Consultant with Financial Network Investment Corporation, located at Clinton Savings Bank in Clinton, Massachusetts (cwilliams@clintonsavings.com), recent tax law changes have “leveled the playing field” for small businesses when it comes to employer-sponsored retirement plans. Many small business owners are not aware of the changes, nor do they have the time to devote to fully understanding their options. That is why Chris says his approach is “all about education, not sales.”
167
168
Financial Health-Check
IS CURRENT FUNDING ADEQUATE FOR RETIREMENT NEEDS?
Chris talks with small business owners in plain, layperson language. He talks about getting from “point A” (where you are today) to “point B” (where you want to be at retirement age). Chris asks a few simple questions to understand the business owner’s situation and current funding for retirement and then shows a visual illustration.
First question: What would you like to live on during your retirement years?
Suppose the business owner needs $5,000 a month to live comfortably in retirement.
Next question: What have you put aside for retirement?
Chris walks the business owner through a discussion as illustrated in Figure 12.1 on pages 170-175.
(This is only an illustration and is not intended to represent any investment.)
The first section is all about assumptions: how long until the business owner plans to retire; interest and inflation rates; and related matters. The second section is about retirement assets. This small business owner and his partner/spouse are each putting away about $3,000 per year. Based on this information, Chris generates an illustration about how much money they will have at retirement.
The illustration clearly shows a shortfall in funds for retirement. At the current funding level, the small business owner will run out of money after three years of retirement. So, how will he and his spouse cover the shortfall?
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