Spring 2011 Newsletter

Spring 2011 Newsletter
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Equity Markets

Worldwide economic growth shrugged off daunting headlines and markets continued their expansion in the first quarter of 2011. U.S. Large Company stocks experienced their best quarterly performance since 1998!

Foreign markets grew as well, although volatility among different countries, regions, and time periods increased drastically due to worldwide events.

Fixed Income Markets

With the yields inching up slightly on bonds, high quality bonds faced headwinds this quarter. Lower credit, high yield bonds (aka “junk”) shared the same tailwinds that the equity markets did and continued their robust climb. It will be interesting to watch how bond yields react to the end of the Fed’s bond buying in June.

Happy Birthday Bull…

March 9th marked the 2nd birthday of our current bull market since the S&P 500 bottomed on 3/9/09¹. This bull market has been vigorous compared to past bull markets which leaves many to question how long it can continue.

What next?
“History doesn’t repeat itself, but it does rhyme” –
Mark Twain

Viewing bounce backs after major bear markets² yields interesting conclusions to the potential longevity of this bull market.

8 of the last 12 bull markets that celebrated a 2nd birthday went on to notch gains for the 3rd year, with an average return of 9%. On a “roundtrip basis”, which includes the bear and the next 2 and 3 years, we can see that the roundtrip performance of our recent market is actually below averages, due to the severity of the ’07-’09 drop.

What to do?
“All generalizations, including this one, are false” –
Mark Twain

Pundits have been predicting this market will drop solely because it’s gone up for 2 years. We don’t know if the market will rise for a 3rd year, but this

analysis shows us that it is not a foregone conclusion.

401(k) Corner – No Free Lunch

While most plan sponsors understand the underlying investment expenses of their mutual funds, many have an erroneous belief that they don’t pay administrative costs. Somebody is paying for the expense; they probably don’t know it.

Bundled vs. Unbundled Providers
There are three separate services that all 401(k) and Profit Sharing plans require: 1.) Custody & trading of securities 2.) Investment Advice to determine investment options as a “prudent expert” would, and #3) Administration- to handle the compliance and testing that a plan requires for DOL and IRS testing. A “bundled” product is where one firm provides all of the solutions-usually in a very standard way. An “unbundled” plan has a separate provider for custody & trading, investment advice, and administration.

Bundled Plans
The belief in “Free 401(k)’s” seems to be a byproduct of insurance companies. Insurance companies typically bundle the investment, custody, and administrative component into one product. The investments have underlying fees, and an additional “wrapper” is then placed on top to compensate the provider for administrative duties. These fees are taken from the performance of the investments and are therefore paid by the participants. This isn’t necessarily bad, many plans would likely never get off the ground if the company had to foot the entire bill. For a small plan, say $200,000, 2.5% “all in fees” are not abnormal for a total annual cost of $5,000.

Unbundled Providers
An “unbundled” plan will have a separate Administrator, Investment Advisor, and Custodian. The administrator will likely have some base fee and smaller asset based fee on top. The investment advisor will also likely have a reduction in their fees as plan assets grow. Different custodians charge differently and each plan requires a review of the most competitive custodian for their situation. In essence, a portion of the unbundled providers’ costs are fixed, and a portion are variable to the asset base.

When Bundled gets Bulky
The problem arises when the plan grows in value. Under the bundled approach, your fees as a percent stay the same, but the dollar value of the fee grows rapidly. Once the plan referenced above grows to $1.5M, the bundled approach yields a total cost of $37,500! In other words; once your plan grows, a bundled provider is likely not the best value! Many people think that their broker or insurance company will automatically switch them into a more competitive plan; this rarely happens.

What to do
You have a legal duty to ensure the plan is paying reasonable expenses. Most experts recommend benchmarking your plan with an independent source or bidding every 3 years. Have you reviewed your plan recently to ensure you and your employees have the most competitive option?

B.O.S.S. Workshops

Do You Know How The Recent Estate Tax Changes Affect You?

In one hour, learn . . .

• Overview of the new estate tax law
• Explanation of portability
• Continued value of Trusts
• What to do now?

Learn more at bossworkshops.com

This Quarter: Estate and Legacy

This quarter’s planning topic, Estate and Legacy, helps our clients ease the difficulty of transitions. This will save their loved ones time, expense and anxiety during stressful times. From succession planning for family businesses to health directives, we help to identify areas where further expertise is needed. We enjoyed learning about succession planning from our last Lunch & Learn speaker, and look forward to learning about changes to the Estate laws this month— more information can be found on page three.

Next Quarter: Protection