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401(K) Plans: 30-Minute 401k
Presentation After years of very favorable tax savings you turn around and
lo and behold you have a nice retirement plan.
But it truly is the tax benefits that encourage most people to take
a serious look at the 401(K). 401k Fact To Consider:
2 : YOUR 401(K) IS COMPLETELY
VOLUNTARY! And new employees can join the 401(K) immediately after
completing a minimal waiting period. The plan is very, very flexible. .
3: FLEXIBLE
FINANCIAL PLANNING You can put anywhere from 1 to 15 percent of your pay into
the plan and you can change that percentage as your needs change.
Typically, people whose income tends to fluctuate throughout the year,
such as sales people on commission, like using a percentage so that their
contribution to the 401(K) moves in tandem with their fluctuating incomes. For employees with fairly steady, consistent incomes
month-to-month, a fixed dollar amount rather than a percentage can be
diverted to the 401(K). Employees can change the fixed dollar amount, or
the percentage, as their needs change. Typically younger people start out directing a smaller amount
of money to the 401(K). As people age and move closer to retirement, the
amount of money they put into their 401(K) tends to increase. But again, I
want to stress whatever amount you do choose, the plan will stay flexible
and under your control. My experience working with thousands of 401(K) investors over
the years, and being one myself, I can tell you from personal and
professional experience that for most people saving money is never easy,
and for most people requires a great deal of self-discipline. Busy working people such as yourselves really benefit by
joining the 401(K) because once you make the decision to join, the hard
part is over. Your savings will occur automatically, in the background,
while you get on with your life. If you participate in your company’s
401(K), one of the things you’ll be getting will be monthly
statements. The statements
come in two forms and I’ll be sure to describe each. The first statement that you’ll get will be delivered to
you at work. It will list your current investment choices, how much money
you’ve put into the 401(K) previously, how much you’ve transferred
into your 401(K) from previous 401(K)s or qualified IRAs, any 401(K)
loan..... It’s basically a complete overview, a snapshot of your 401(K),
and it’s updated every 30 days. But, in addition, when you get home at night, in your
mailbox, there’ll be statements for each investment you’ve selected
for your 401(K). These will be separate, confirming statements proving to
you that your money went where it was supposed to go, and was invested
according to your instructions. And at this point I want to highlight one of the biggest
differences between your company’s 401(K) and the typical old-style
401(K). With the typical 401(K) everybody’s money is mixed together in
large investment pools, then a pension administration company is hired to
keep track of each person’s percentage interest in the pool. This system
is very inefficient and often leads to errors. But with your company’s 401(K), the situation is very
different, and the difference works to your benefit.
With your company’s plan, if you decide to join, a personal
mutual fund account with your own personal account number will
be established just for you. Your 401(K) savings will be held separately
and discretely from all other participant savings, never to be co-mingled
or pooled. Setting up these individual, personal mutual fund accounts
rather than co-mingling your money with everyone else’s’ has multiple
benefits for you. The first benefit, of course, is that monthly statements
are generated with each monthly 401(K) purchase.
The second benefit is that 24 hours a day, seven days a week, if
you have a question concerning your account you can get information
quickly and efficiently by simply calling the mutual fund companies and
referencing your account numbers. But the biggest
advantage in setting-up individual accounts comes down the road,
as I will explain with the next . Please consider the following...We all know that most people
don’t stay with one single employer throughout their working careers,
but from time to time change jobs. With the Automatic IRA Rollover feature , if you leave the
company your 401(K) account, at your discretion, will be automatically
converted to an IRA at the mutual fund company you’ve been investing
with and in the exact portfolios you carefully selected. And this is the
same mutual fund company you have gotten to know because they have been
mailing account statements to your home every single month. But getting back to the Automatic IRA Rollover, if you’ve
gone to the trouble and made the effort to carefully pick quality
investments for yourself, the Automatic IRA Rollover allows you to
maintain the integrity of the investment decisions you’ve made.
Why? Because if you leave the company we simply convert your
individual 401(K) accounts to Automatic IRA Rollover accounts at the
mutual fund company. Your investment choices remain the same, and only
change if you decide to change them! But the biggest advantage of the Automatic IRA Rollover comes
down the road, as I well describe with the next . This
graph illustrates what may prove to be the greatest advantage of the Automatic
IRA Rollover. Today this advantage may theoretical, but one day this
advantage may be very real, and very pertinent. Let’s say you join the 401(K) and decide to make a series
of appropriate investments, applying the principles of good investing
we’ll be discussing later in the program. And for discussion’s sake,
let’s say it’s now 2002 and your carefully selected investments are
down in value. Well, you selected your investments that match your long-term
goals, you understand that investments tend to go in cycles, and you’re
willing to live with your investments through both the good times and the
bad times. Getting back to our example, it’s now 2002 and the phone
rings at your desk. You pick it up and you’re offered a job that you
absolutely can’t refuse to turn down.
You’re going to leave your job for a new opportunity.
Well, with the typical 401(K), if you’ve made investments that
are now down in value, when you leave you’re out of luck because your
401(K) will be automatically liquidated, and the proceeds will be sent to
you, thereby locking-in a loss! But with this 401(K) that will never happen, and
here’s why. When you leave your present employment, at your discretion,
your 401(K) can be quickly and easily converted to an Automatic IRA
Rollover, and you get to keep the exact same investments you always had,
unless you decide to change them. These are the same investments
you carefully selected previously. You can hold them, and wait for them to
recover in value, or you can change them when the time suits you. Just by
leaving the company’s plan you are not forced to take a loss, and with
the Automatic IRA Rollover your connection to the mutual fund company
remains intact. Earlier in the presentation while discussing the monthly
statements I mentioned 401(K) loans. Now I’ll take a few moments to
describe the loans in more detail. Let’s begin this discussion of 401(K) loans with a warning.
401(K) loans are usually not in the borrowers best long-term interest, and
your 401(K) savings should always be the money of last resort. Why? There
are several reasons, which I will share with you in a moment. For now,
however, please consider these general loan restrictions: 401(K) loans are typically granted for the four following
reasons: to prevent
foreclosure of a residence or to purchase a home,
to pay a medical expense, an education expense,
or a disability expense. If
you have a family need that falls into one of those four broad categories,
you can borrow from your 401(K). You
may borrow up to half the value of your account and if you merge other IRA
Rollovers or previous 401(K)s with your current 401(K) you can borrow half
the value of these funds as well, as they increase the overall collateral
of your 401(K). Loans typically must be paid back within 5 years, but there
is an exception if you borrow to purchase a home, in which case you can
take 10 years to repay the loan. There is an interest rate attached to the loan, but
interestingly, the interest you pay goes right back into your 401(K) with
your principal payments. Because you’re borrowing your own money, you become a
banker to yourself. You’re
not borrowing the money from any one else, so you don’t owe anyone else
interest for the use of the money. You pay yourself for the use of
your money, and the loan payments are done automatically by your payroll
department on an after-tax basis. So far, so good. But
it’s very important not to think of your 401(K) as an automatic teller
machine; your 401(K) should only be the money of last resort. Frivolous
loans should be avoided. Why? There are two main reasons: First, if you take out a 401(K) loan you are removing your
money from a IRS-sanctioned tax-deferred environment. As will be
covered in a moment, the 401(K) allows your investments to grow on a
tax-deferred basis which is a huge advantage to you. Secondly, if you take out a loan and then quit your job or
are terminated before the loan is fully repaid, you will have only a
limited number of days, typically 90, to repay the remaining balance, and
if you don’t or can’t pay off the loan, the portion that is not repaid
will be reported to the IRS as a loan default. A 401(K) loan default is
serious business, exposing the borrower to significant IRS and state tax
penalties and even a possible audit! So, when it comes to 401(K) loans you want to be cautious.
If you have a serious family need, it is reasonable to use the
money. But don’t take out a
401(K) loan thinking it’s a source of easy money, because it’s not. When I began this presentation, I stated that the vast
majority of people who join 401(K)s do so not because they’re thinking
about retirement, but because they’re aware of the fantastic tax
savings. The savings are significant and they come in two forms.
Most people, especially people who’ve been in 401(K)s in the
past, are already familiar with the first of these two tax benefits, but
I’m going to make sure to cover both. The first tax benefit of 401(K) participation is that for
every dollar you put in the 401(K), you get a dollar tax deduction on both
your state and federal income taxes. This
means that for every dollar you put in the 401(K), approximately 60 cents
is your money, and the remaining 40 cents is money that otherwise
would be forfeit, and paid out to the taxing authorities had you not
joined the 401(K). The 40l(K) literally allows you to keep more of the
money you’ve earned for your benefit and your family’s
benefit. To stay on this first of the two tax benefits for a moment
longer, please consider the following..... 10:
SEAN PENN’S W-2 You are now looking at a standard W-2 form.
This is an old one from 1987, but like other government forms,
hasn’t changed much over the years, and it’s still useful in
communicating an important point about the tax benefits the 401(K). In this example, let’s consider Sean Penn’s 1987 income
of $24,000, which he earned while working for the Radio Ad Monitor
Company. In the case of Social Security, Mr. Penn will receive his
complete Social Security benefit. The
401(K) will not reduce by one red cent your Social Security.
What it does reduce is the amount you pay in taxes, and it works
like this: In this example, had Mr. Penn, who earned $24,000, decided to
put say $2,000 in his 401(K), it would mean that at the end of the year
when his employer Radio Ad Monitor Company generates his W-2 form, in the
box that posts taxable wages, it would indicate a taxable income of
$22,000, not the $24,000 Sean actually earned! Sean really did earn $24,000.
But in the eyes of the government, he earned $22,000.
As a result of reporting $22,000, when state and federal income
taxes are calculated, they’re calculated on a lower base income, and
mathematically he has to save on taxes! And now let us go to the second of the two tax benefits of
401(K) participation. 11:
TAX DEFERRED GROWTH I cannot over emphasize the significance of this second tax
benefit: tax deferred growth. It’s
equally as powerful as the first, but it often times doesn’t get the
attention that it deserves. Please consider: As you invest in your 401(K), as you put
money in monthly and as your investments grow, they grow and grow on a
tax-deferred basis, which means they grow much more quickly than the exact
same investments made outside a 401(K). And I will prove with the next . I’m going to make the case for tax-deferred growth and the
huge financial advantage it represents for you. Consider: Let’s say you
decide to save for retirement in your company’s 401(K).
You sat through this presentation, reviewed the information, and
decided to join. After careful consideration of the several investment
options, you decide to invest in the XYZ Total Return Fund. But you’re
not quite sure about this “tax-deferred” growth business, and growing
up you learned to be a bit skeptical, and check things out for yourself,
so this is what you did: You went downtown, walked into an office of a brokerage like
Charles Schwab, and bought
with you own after-tax money the XYZ Total Return Fund...the exact same
investment you selected for your 401(K).
Every investment offered in your company’s plan is available to
you outside the 401(K). Returning again to our example, you now own the XYZ Total
Return Fund inside your 401(K), and you purchased the same XYZ Total
Return Fund outside your 401(K) with your own money. And to check out and
verify the advantage of tax-deferred growth, every single month when you
put money inside your 401(K) XYZ
investment you make certain to put the exact same amount of money in the
exact same XYZ investment outside your 401(K). Let’s say you do these monthly purchases of the XYZ Total
Return Fund for the next 25 years. At
the end of 25 years, you would think that the XYZ Total Return Fund inside
your 401(K) is going to be worth the same amount of money as the XYZ Total
Return Fund you have been building-up outside your 401(K) because:
a) they’re the identical investment, and b) you put the identical amount
of money into each, and c) you’ve held them both XYZ Total Return Funds
for an identical length of time. The fact of the matter is that at the end of 25 years your
XYZ Total Return Fund inside your 401(K) can be worth considerably more
than, perhaps double, the value of the XYZ Total Return Fund you hold outside
your 401(K). Why? The
difference was tax-deferred growth. The
XYZ Total Return Fund you held inside your 401(K) was allowed to
grow and grow and grow over the years without being taxed whereas the
exact same investment outside of the 401(K) was taxed every single
year. And those of you who maintain savings accounts or make other
investments know what I’m talking about.
You know that in most cases you are obliged to pay income taxes on
dividends and interest earned from investments, and you pay these taxes
every single year. But at this point in the discussion you might be thinking,
“ahh-hha,” but don’t I have to pay some enormous tax down the road
to make up for the fact that I got all of this tax-deferred growth I got
in my 401(K) over the years? If
you think that, you’re wrong. It’s
absolutely, categorically not the case!
You pay significantly less money, tax-wise, and here’s why: To explain I will create a comical example of the wrong
impression some people have of the 401(K) and tie it to this discussion of
tax-deferred growth. Some people imagine that when they retire, they will call the
mutual fund company that holds their 401(K) investments and say “I’m
retiring, send me my money.” The
mutual fund company will write a great big check representing the entire
value of the 401(K), but just as the neighborhood postman is about to hand
over the check to the retiree, Uncle Sam leaps out from behind some
bushes, grabs the check from the postman’s hand, rips off a big portion
to pay the deferred taxes, and hands over the remainder to the hapless
retiree. The retiree has just paid some huge tax on his 401(K) savings. Obviously this is an absurd example, but I use it to drive
home an important point. The
illusion some people have is that they will be forced to pay some enormous
tax on their 401(K) savings when they retire.
That’s not the case. What really happens is when you’re are ready to
retire and start tapping into 401(K) IRA Rollover, you simply call the
mutual fund and tell them to transfer
X dollars each month from your 401(K) IRA Rollover into your
personal checking account. The
mutual fund company will do the transfer every month, automatically, until
you tell them otherwise. You pay tax only on the portion that transfers from the
401(K) IRA Rollover to your personal checking account! That’s the only
portion that’s taxable! With only some exceptions, the bulk of your
retirement savings stays behind in the 401(K) IRA Rollover, growing
tax-deferred, until you choose to draw it out and spend it!. Your 401(K) will continue to grow, tax-deferred until you
draw it out. But you just draw
the money out a little at a time, as you use it. You don’t take it all
out in one fell swoop.
Please open your enrollment envelope and take out only the
401(K) ENROLLMENT FORM. We’re not be going through this form page by
page, but any discussion of 401(K) investments and strategy should begin
here. In the world of investing, there is a direct relationship
between risk and reward.
The more risk you’re will to take, the higher is your potential
reward, but also is your greater potential for loss.
Each person who joins a 401(K)
is unique, with individualized financial needs and life experience.
And yet everyone who joins a 401(K) could place him or herself
somewhere on a continuum from being a very conservative, risk-adverse
investor at one end of the spectrum, to being a very aggressive, high-risk
taking investor at the other end of the spectrum. An investment that might be right for one person might be
totally wrong for the person he or she sits next to at work.
Everybody is different but what’s important is that each person
should select investments that fit his or her personal needs;
investments that he or she can live with through good times and the bad times. What you want to avoid is falling into the trap of thinking
you can closely monitor your investments for a sign that they are about to
raise or fall in value. For most people outguessing the short-term
direction of the market, or the direction of a specific mutual fund
investment, is pure folly. Don’t be fooled into thinking frequent
switching between mutual fund investments is a good, workable idea. If you over-manage your mutual fund
investments the odds are you’ll have a disappointing time with them, and
probably your other non-401(K) investments as well. The people who invest
successfully in 401(K)s take a little time in the beginning to select
quality investments that are right for them, and they stick with those
investments as they go through their inevitable cycles.
Remember, I mentioned earlier that
most investments tend go in cycles. The key is to a successful 401(K)
experience is to pick investments that you can be comfortable with and
stick with them as they go through their cycles, through the good times
and the bad times. 1: THE
THREE PRINCIPLES OF GOOD INVESTING There are three basic principles to investing that we
strongly recommend you follow before making any investment decision. These three principles will guide you to
a much more successful 401(K) experience. The first principle of good investing is to diversify you
investment selections, which is a fancy way of saying,
“don’t put all your money in one investment.”
Or, some of you may have heard me say “don’t put all your eggs
in one basket.” It’s
basically, the same thing. What
you want to do is pick two or three different investment choices. In our
opinion, two or three investment choices is about the right number. Please don’t leave this enrollment presentation thinking
that if two or three are good, then
perhaps six, eight or ten are even better.
That’s not the case. Too much diversification is as bad an idea
as no diversification at all. Why?
Because investments have a way of neutralizing each other or even
working against each other. What
you want to do is really focus on the two or three that are right
for you rather than putting your bets on a whole lot of different
investments, then crossing your fingers and hoping for good luck. Now there is an exception to the diversification principle:
Two or three choices is about the right number of 401(K) mutual
fund investments for most people, but there are some people with huge
amounts of money in their 401(K)s. Some
people have been investing in 401(K)s since 1974 and may have upwards of
$400,000 their 401(K) at this point.
For these people it’s appropriate to have more choices, with
perhaps $80,000 per choice. But for most people starting out, especially those who have
less than $20,000 in their 401(K), we recommend the right number of
investment choices to be two or three. This second of the three principles of good investing is, in
our opinion, the most important principle to follow.
Unfortunately, it’s the one most often ignored.
What you want to do is select mutual fund investments that
fit your personality, goals, and temperament.
Most people don’t even consider these factors before they select
investments for their retirement savings.
Let me tell you what most people do. Unfortunately, most 401(K) participants either (a) pick the
same investments as a trusted co-worker selects, or (b) chose investments
based upon a recent news story, or (c) they’ll take a list of
investments, like the list you have in front of you, and they’ll start
scanning down the list and all of a sudden the name of a mutual fund will
just sort of jump out at them. For example, some people might scan down a listing of
investments and perhaps see one called something like the “ABC Galaxy
High Octane Emerging Growth Supercharged Fund For the Bold At Heart” and
they’ll go “wow, that sounds like the right investment for me!” They’ll invest their money in a dynamic-sounding name
without really considering the following: The names of these investments
are carefully crafted by marketing and advertising experts as a way of
drawing your money to them.
The names may, or may not have much to do with the underlining assets in
the portfolio. People in business, especially marketing and advertising,
have a great appreciation for the power of the spoken work, or the written
word. Please keep in mind tat the names of mutual fund portfolios are
designed to draw your money to them like a magnet draws iron. Again, the
names may or may not have anything to do with the underlying investment! What you need to
do is look behind the name. But
how do you do that? How can
you look past the name? It’s really quite simple. You get a booklet,
called an investment prospectus and you read the first few pages. Prospectus have been ordered by your employer and are either
currently on-site, or easily ordered directly from the mutual fund
companies. In most cases the phone numbers to order prospectus are printed
in the Enrollment Form. But, that still doesn’t answer the question how
do you select investments
that fit your personality, goals, and temperament?
How do you do it? Well,
to help you in the process of finding investments that are right for you,
we’re designed a questionnaire, which is in your enrollment envelope.
This questionnaire will take you all of 5 minutes to read and
complete. If you take the 300
seconds to go through the questionnaire, you’ll be able to answer the
most important question that you have to answer before taking another
step. You will be able to
answer the question, “What kind of investor am I?”
Why I’m a conservative investor...or, I’m a moderate
investor...or, I’m an aggressive investor! Using the questionnaire helps gets you into the right
ballpark. After determining the type of investor you are, we strongly
recommend reading the prospectuses of the investments that interest you.
Also, review the historical performance track-record and of the
investments that interest you. Applying the Three Principles of Good Investing is the best
way to make a focused, informed decision that matches investments to you,
and not the other way around! This is the last of the three principles of good investing
and it may be obvious to a fair number of people, but it‘s important to
mention anyway. You need to maintain a long-term perspective when investing
in mutual funds. If you’re
in a 401(K) you’re in it for years and years.
You should not be overly concerned with the daily, weekly or
monthly fluctuations and gyrations in the value of your mutual fund
shares, because prices will tend to cycle. What you should be thinking
about and focused on is the long-term multiple-years track record
of your investments. Likely there will be years when your investments are going
up, and there will be years when your investments will go down. There will
be years when your investments stay fairly level. That’s just what most
investments do. The underlying long-term trend, however, has historically
tended to move up over time. Additional non-profit websites that include relevant unbiased information about 401k plans include: www.401k-administration.com and www.no-load-401k.com The 401k is typically understood by the government as a way
for you to save for your retirement. The
government’s policy is that you’re not supposed to tap into your
401(K) or Automatic IRA Rollover until you’re at least 59 1/2.
In practice, most people really don’t start taking money out of
their retirement accounts until they’re well into their 60’s, but
guidelines require that you be at least 59 1/2 before you can take money
out without penalty. Now, you can, if your plan permits, borrow from your 401(K)
for a family need, and there’s no penalty associated with borrowing, so
long as pay the money back according to the terms of the loan. But if you
physically take the money and use it before 59 1/2 you will be, in most
cases, subject to the following: Physical extraction of money from your retirement plan prior
to age 59 1/2, or failing to repay a 401(K) loan, subjects you to a
combination of IRS penalties and taxes that works out to approximately
50%, or 50 cents on the dollar! To restate what I said earlier, retirement
money your spend before your 59 1/2 could easily be the most expensive
money you ever spend in your life. You really want to leave the 401(K) alone for your
retirement. If you have a
family emergency, the money is there to borrow, but you’re really not
supposed to use it until you’re over 59 1/2.
In addition, you may be subject to additional penalties or charges
imposed by the mutual fund investment companies, so please read the
prospectus carefully. As you invest in your 401(K), if you decide to change your
investments within a family of funds, you can do so whenever you
want. Changing your investments is as simple as completing a new
Enrollment Form and turning it in to the business office for processing.
All your instructions and communications are in writing, which protects
you and provides clear documentation of your investment intentions. Again, changing investments within a family of funds
is easy to accomplish, as is having your 401(K) automatically converted to
a IRA Rollover upon leaving employment. In conclusion, we wish to thank you for taking the time today
to sit through this program and carefully consider whether the 401(K) is
an employment benefit you wish to use now, or sometime in the future. If
you join now the tax benefits and tax savings begin with your first
contribution, and continue until years down the road when you begin
withdrawing your retirement savings. The choice is yours, and if you do
join the 401(K) we will do all we can to make it a successful and
financially beneficial experience. rrp
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