Answers in Retirement Plans

Rita, I probably cannot tell you specifically what to invest in, based on a few short paragraphs about you.

I recommend you seek out a good financial advisor in your area. Find someone who is not trying to sell you the moon and the stars; someone you feel comfortable with, that is looking out for your best interests.

And this is why. You really should have a financial plan. You need to address income, safety and longevity, as well as possible liquidity concerns. You need to take a risk tolerance questionnaire so you more accurately know what level of risk you can tolerate. You need to know what it takes for you to be able to sleep at night.

I would expect you need some growth, but not above your personal comfort level. I would not recommend VTINX as your only holding, It is fairly conservative with relatively low risk. I would agrue that in a well managed and diversified portfolio as part of an overall financial plan, you can get greater diversification and performance without much difference in risk. And VTINX or something similar, could be a part of that plan

I know of $80,000 Non qualified and 23,000 Qualified. I don't know what is in your cash emergency savings. Though you would not actually co-mingle the monies, you can strategize the 2 accounts to come up with a plan. I am not so comfortable with you putting all your savings in an annuity. You would get a guaranteed income, but your money becomes illiquid. If you can work out a cash flow plan that works for you with a portion in an annuity, that makes more sense to me.

Without knowing details, I have concerns about you not expecting to live more than 12 years. Though it may be true, the possibility exists that you plan for 12 years, and then outlive all your money. Irony.

Again, without knowing all the details, I would try to set up with a financial advisor a low fee, well diversified, risk managed portfolio. I would try to be on a budget where you live as frugally as you comfortably can. Try to stretch those retirement dollars. Retirement planning and wealth management are important on any level. If you look, you can, and will, find an advisor that makes sense to you and will help you.

Hi Rita, Congratuations on your retirement. To preserve your $60,000, and if this is the only money you have to work with, consider an immediate annuity where your beneficiaries receive whatever you have not received from the $60,000 - if you outlive the annuity, it will pay the monthly income benefit for your life. At your age, you should be able to find a company who will give you at least $400 of income per month for life, I'll be happy to help, give me a call.

Take your time! Before you can properly invest your $60,000 of savings you need to fully understand your monthly expenses. Compare your monthly expenses to your monthly income which seems to be just social security. Now if your expenses exceeds your income, the difference is your monthly short-fall amount. I would take this amount and multiply it by 24 months and determine the amount of un-investable funds that should be maintained in a cash account. review annually and increase from the investment account.

Now deduct your amount of un-investable funds from the $60k to determine your available funds to become investable funds. Now you have to determine your risk appetite or risk tolerance before you can invest. I would expect it to be maybe a 50% stock and 50% income mix. This is critical to determine before you invest any dollars in any investment(s).

Also before you invest any money in any funds review the operating expenses or costs of what you invest in. You may not control the market results but you do control where you invest and the related costs of investing!! Low cost ETF's may be your best option.

No professional can make an investment recommendation for you based on the limited information you have already provided. But please be careful before you invest your life savings because the risks and costs vary widely.

Do you know what is in the Vanguard Target Retirement Income Fund? There is a high probability that fund will experience a significant downturn at some point. Either the stock market portion will get it or rising interest rates will. That doesn't mean it is a bad fund, you just need to understand the potential for volatility. You might be better off purchasing the individual funds that make up your fund and drawing down from the specific assets over time. This is the beauty of dealing with no load mutual funds, you can get the economies of scale with a relatively small amount of money. Good luck to you and be flexible with your distributions.

Rita, The answer to your question depends on your financial situation (i.e. sources of income and assets other than the $60K you mentioned), lifestyle and expenses, health and family health history, investment knowledge and experience, risk tolerance and time horizon for various financial objectives. I would suggest you hire a financial advisor who will ask for this information and then be able to provide you appropriate and effective advice. As others have stated, at 71, you can't afford to make mistakes with your retirement savings. Working with a financial advisor should increase the likelihood that you will make the right decisions and be able to maintain your lifestyle, comfort and financial security throughout retirement.

Rita,

As you know, at your age you have to be very careful what you do regarding investing your money for your retirement. Unlike a younger person, you can not afford to make a mistake primarily because you will not have enoughy time to recover any losses you may experience.

So, first I need to say that because you can not afford to lose any of your $60,000, you should only consider putting your money in the most conservative investments. Only problem is that conservative investments will not give you a very high rate of return on your money, although your principal will be very safe and you should not have to worry taking a loss.

My specific recommendations for you to consideration would be for you to put some of the $60,000 into a government insured bank CD or if you think you will want to spend some of that money soon, consider placing some of it into a bank money market fund. Check a few banks in your city to get the best rate you could find.

Another choice for you to consider is to give some or all of your money to an insurance company and put your money into an annuity that can be used to supplement your $350 per month. Because there are many choices of the type and the terms of an annuity that you can get, I suggest that you find an annuity specialist that can explain your choices to you and perhaps even make a recommendation to you. The primary reason that I like the annuity option for you is because the annuity can be structured to pay you a monthly amount and even delivered directly to your checking account. And by the way, the monthly amount can be paid as long as you live. In other words, you can structure the annuity in such a way that you will not be able to outlive the monthly annuity payments.

Good luck to you.

Sincerely,

Herbie Glass,

How much are looking to withdrawal monthly? What is the longevity in your family and how is your health? Do you have consumer debt or a mortgage? May want to consider putting half in an annuity to guarantee payments for life and then invest 20k in a high dividend etf fund and 10k in the money market for emergencies. Unfortunately 60k is not what it used to be and will not provide much of an income or cushion for health issues, etc. If you own a home without a mortgage, you may even consider a reverse mortgage to create more access to funds. Would need to know more about your situation to render a more complete answer.

David, the short answer is that defined benefit plans have rules distinctive to the plan that dictate when and if, you can make a lump sum distribution. The really, really, good news is that the plan is advising your mother-in-law that she needs to take action. In the overall scheme of retirement planning, so long as one of those actions is to roll it into an IRA, she should do so.

She should follow the instructions on the letter, or if she has questions, call the sender of the letter. It is most likely the plan administrator.

She does not want a check written to her; that would be a taxable event. Rather, she would open an IRA, or Roth IRA, and then have the monies either sent directly to the new plan, or to you written to the custodian of the new plan. It sounds like it is getting complex, but as you start completing forms, you will see the options I am talking about, and it will flow into place.

As you may be aware, if you open a Roth, you will have to pay taxes on that money as taxable income. As she is unemployed, it could be very little, or possibly no additional tax. If the father-in-law is earning income and they file jointly, that needs to be considered for taxation purposes.

David,

Your mother-in-law could request a rollover to an IRRA (Individual Retirement Rollover Account) given her stated benefit amount if the defined benefit plan document allows. The rollover account cannot be a joint account as they are individually titled. Your father-in-law should open his own IRA or Roth IRA and make contributions to it or if he has a retirement plan with his current employer, such as a 401(k) plan he should be making contributions into the plan. They should work with a financial advisor and account to determine the best options for their specific situation.

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Aleksandr, It is simply a choice the fiduciaries of the plan have made. If you take the "unitized" issue out of the equation and ask why would a plan offer company stock, the company owners probably want to give their employees an easy way to invest in the company. Employees who have some skin in the game through equity ownership may be more motivated than those who do not. Good luck.

Hi Louise! I won't rehash the good information from my colleagues - they hit all the right points. You mentioned that you have had the money in a CD for a long time. Since you are nearing retirement age, you may want to take time to decide what the purpose of this money is for you. Is it for retirement? Or just savings with no particular goal in mind? Thinking about how you may want to use the money may help you decide what type of investment product would be appropriate for you. I do recommend spending some time with a fee-only planner to help you decide what would be a good investment for your circumstance. Best wishes to you!

From the Internet:

Does your 401(k) plan offer participants the opportunity to invest in employer stock through a unitized stock fund? If so, you should review and consider whether your plan's investment committee (or your board of directors or other plan fiduciary responsible for selecting and monitoring plan investment options) needs to adopt the best practices suggested in this alert. These suggestions are based on a recent Seventh Circuit case and are intended to help plan fiduciaries comply with their ERISA prudent investor duties.

Background

In a unitized company stock fund, participants own units of the fund rather than shares of company stock. To enhance liquidity, these funds are comprised of a small percentage of cash or similar short-term investments in addition to stock. A large number of company stock funds offered in 401(k) plans are unitized. These funds allow faster processing of fund transactions and save transaction costs by allowing the plan to net participant transactions and use the cash in the fund to make distributions and transfers to other plan funds. Absent unitization, every time a participant buys or sells shares of company stock, the plan must enter the market to sell enough stock to fund the transaction, a process normally taking three days, and must pay brokerage commissions and fees on each transaction. Unitization allows the plan to offset participant purchases and sales within the fund and enter the market only as necessary to meet the demand of net sales or net purchases from the fund.

Although unitized stock funds can benefit participants as described above, in George v. Kraft Foods Global, No. 10-1469 (7th Cir. April 11, 2011), participants in the Kraft 401(k) plan sued, asserting that the plan maintained excessive cash in the unitized company stock fund, allegedly causing the fund to underperform direct investments in company stock by $83.7 million between 2000 and 2007. The plaintiffs referred to the loss of return as the investment drag associated with unitized stock funds (of course, the inverse could be argued to be true in a declining market where the cash and cash equivalents provide a buffer from the loss in stock value). The plaintiffs also complained about transactional drag or the reduction in the overall return of the fund by charging transaction costs to the fund as a whole rather than to the specific participant who initiated the purchase or sale. The plaintiffs alleged this practice encouraged frequent trading resulting in higher transaction costs.

The plaintiffs sued Kraft and various committees and individuals associated with the operation and administration of the plan (plan fiduciaries) for breach of the prudent man standard of care due to their alleged failure to take any actions to address the transactional drag associated with the fund. The record revealed correspondence between 2002 and 2004 in which the fiduciaries were (1) advised by a related employer that it was moving away from unitization in its 401(k) company stock fund because of the costs, and (2) offered various solutions by the plan's recordkeeper to mitigate the transactional drag in the company stock fund even though the plan's recordkeeping did not have the capability to offer its clients a non-unitized stock fund. The district court granted summary judgment in favor of the defendants on the basis that the fiduciaries had weighed the costs and benefits of implementing the proposed solutions and concluded that the costs of making any changes to the company stock fund outweighed the benefits.

The Seventh Circuit reversed the district court's decision, finding that nothing in the record indicated the fiduciaries ever made a decision regarding the issues. The Seventh Circuit remanded the issue to the district court to determine if the circumstances prevailing in 2004, when the fiduciaries were presented with the issues and proposed solutions regarding investment and transactional drag, would have caused a prudent fiduciary to make a decision. If so, the Seventh Circuit noted that the Kraft fiduciaries would have breached their fiduciary duty under ERISA.

Although the Seventh Circuit did not reach a decision in the above case as to whether a breach of fiduciary duty actually occurred on either issue, it is important to note that the Seventh Circuit did not find that offering a unitized company stock fund is inherently the wrong decision and, in fact, pointed out situations where a unitized stock fund can actually inure to the benefit of plan participants. However, in light of the Kraft decision, plan fiduciaries may be subjected to more legal challenges by participants if their decisions, in hindsight, result in substantial losses to the plan.

Fiduciary Best Practices

The best defense against potential legal challenges relating to the prudence of investment options is for plan fiduciaries to deliberate, decide, and document issues that may have an effect on plan investments and returns, to make decisions on those issues when possible, and to document the analysis and decisions made. Based on the Seventh Circuit's opinion, plan fiduciaries whose plans offer unitized stock funds as an investment option should make sure that, at a minimum, they have implemented the following best practices:

Best Practices for Unitized Funds

The plan's investment committee (or board of directors or other plan fiduciary responsible for selecting and monitoring plan investment options) should:

Hold regular meetings (generally, at least quarterly), make decisions, and keep minutes documenting the decisions and the process. (The Kraft opinion suggests that if meeting minutes had reflected express approval of continued investment in the unitized stock fund based on the evidence the fiduciaries considered between 2002 and 2004, the court would have ruled in favor of the plan fiduciary since no evidence was presented that the decision to use a unitized company stock fund was imprudent.)

Ensure that minutes reflect the factors that were considered in making decisions. (It would have been helpful to the Kraft plan fiduciaries if they had been able to distinguish why they were not taking the same actions as Kraft's related employer in moving away from a unitized stock fund.)

Evaluate the relationship with the plan's recordkeeper on a periodic basis. (Many plan fiduciaries regularly evaluate the mutual funds offered by their retirement plans, but do not regularly evaluate the overall administrative relationship.)

Ask consultants and other advisors whether the plan has adopted any administrative practices that reflect a minority approach relative to other plans of its size, and whether there are any other trends with respect to investment or administration issues that the should be considered (such as technological changes that may facilitate the move away from unitized stock funds).

Sorry for all the detail, but, they said it better than I could...

Good Luck

Rod