Roth 401(k) Plans Off To Slow Start

Prior to its introduction last fall, many experts anticipated the introduction of the Roth 401(k) option as the most significant development in retirement planning in a decade. So far it hasn't lived up to expectations.
WorldatWork, a national association comprised of compensation and benefits professionals, reports that 60% of their members have said "no thanks" to Roth 401(k)s. Only 7.2% of members committed to offer the plan as of the end of January, according to the association.
Given the lack of employer participation, changing jobs could also present a hurdle for workers, as a Roth 401(k) can only be rolled into a new employer's Roth 401(k) or a Roth IRA, according to Brett Goldstein, president of The Pension Department in Hicksville, N.Y., and a pension administrator.
After examining the regulations governing Roth 401(k) options, some experts think it has its share of drawbacks. They suspect some regulations are causing many employers to think twice before offering them.
Among the most important, says Goldstein, is that a distribution can only be made once the participant has reached the age of 59, become disabled or died. "If a distribution is made from a Roth account within five years of the participant's first contribution, it will not be tax free. Obviously, this is not a good program for people who plan to retire within the next five years."
Observers say for these and possibly other reasons-including administrative costs and not wanting to confuse employees with yet another retirement savings option-adoptions of the Roth 401(k) plan have been relatively slow. "In addition, there is so much paperwork-determining which contributions are qualified versus those that are unqualified-that the slowdown in the rollover process could lead to lost earning opportunities," Goldstein says.
He adds that there may be fees tied to Roth 401(k) rollovers that are born by the employee. "Investing in a Roth 401(k) program must be taken very seriously," he says. "If the investor has any near-term plans for the money, I would research other options. The Roth 401(k) is best for people who can basically forget about their investment until they hit retirement age."
It's too early yet to call Roth 401(k)s a bust, particularly since they offer high-income workers a way to save $18,000 a year, let it grow tax-free and then withdraw the funds without any taxes. But its lame launch has surprised many.

Schwab To Present Awards
Schwab Institutional is introducing a new set of awards for independent financial advisors. Nominations are being opened on April 3 and the awards will be presented at the firm's annual conference in early November.
Officials at Schwab made it clear that the eligibility guidelines for the awards were independent of any firm's custodial relationship. "When I'm out visiting clients, they are always asking who's doing what best, and who has the best practices," Schwab Institutional President Deborah McWhinney says. "So we wanted to single out firms that are doing specific things well and, more importantly, help others see how the best firms [operate]."
The new program encompasses three awards. The Charles R. Schwab IMPACT Award is something of a lifetime achievement award recognizing an advisor with vision who was instrumental in starting his or her own firm and demonstrated client commitment while becoming a leader in the business. Nominees for this award, which carries a $25,000 contribution to a charity of the advisor's choice, must have at least ten years in the business.
The other two awards, the Best-in-Business and Best-in-Technology Awards, focus directly on best practices in business management and client services and, as the name suggests, technology. Each of these awards sports a $10,000 contribution to a charity selected by the winner.
Self-nominations are prohibited for the Charles Schwab Award; only peer nominations are permitted. Anyone, except clients of advisors, can nominate an advisor for the other awards, and a panel of experts will also submit outside nominations. The accounting and consulting firm Moss Adams LLP will score all entries and select the finalists. Nominations and submissions can be made at after April 3.

Paying Tuition In Advance Is Not A Gift, IRS Rules Again
In a recent ruling, the Internal Revenue Service reaffirmed that writing a check to a school for another person's tuition is not a taxable gift, even if paid many years in advance.
Since the 1980s, the tax code hasn't considered it a gift if you pay tuition for someone, provided the money is paid directly to an educational institution that meets IRS standards. (Payments made to another individual's medical provider fall under this rule, too.) Qualifying payments therefore do not eat into the donor's $1 million lifetime gift-tax exemption, $12,000-per-recipient annual exclusion or $2 million generation-skipping transfer tax exemption. Nor do such transactions have to be reported on a gift-tax return.
In 1999, a taxpayer asked IRS whether the rule would apply even if the tuition payment covered future academic periods. Sure, said the Service. The taxpayer who requested Private Letter Ruling 199941013 subsequently moved more than $150,000 out of her estate transfer-tax-free by prepaying private preschool through high school for two grandchildren. The new ruling, PLR 200602002, permitted prepayment of six grandchildren's tuitions.
"For very wealthy individuals who remain concerned about estate tax and who have already used their gift-tax exemption, this is a great technique for reducing the estate without having to pay transfer tax," says tax attorney Mark L. Silow, the administrative partner and chief operating officer of Fox Rothschild LLP in Philadelphia. Silow says the strategy is most commonly utilized by grandparents with a net worth in excess of $10 million.
In the cases that the IRS ruled on, the taxpayers did not receive a discount from the school for paying early. In fact, the taxpayers agreed that they, or the students' parents, would pay the difference if the tuition later rose. Their agreements with the schools also made clear that the tuition was nonrefundable in the event of the student's withdrawal-a critical requirement, many experts believe, as well as the biggest drawback to the technique.
"Prepaying tuition probably makes more sense for K-through-12 private school than for college because there's greater certainty the child won't drop out or transfer," says Rick Darvis, a Certified College Planning Specialist in Plentywood, Mont., and president of College Funding Inc.
Other situations where it may work: When the donor is an alumnus who is happy to contribute to the institution regardless of the donee's attendance there, and in deathbed-planning scenarios where a federal estate tax bill looms.

401(k)s: Participation And Contribution Rates Are Down
Tax-deferred retirement savings plans are gaining in popularity among employers, but average American workers are participating at a lower rate and deferring less than in 1999, says a recent report.
According to recent data, participation in 401(k) plans continued to decline last year, raising questions about how prepared workers will be for retirement.
Since 1999, participation in 401(k) plans has eroded, going from 80% participation to 70% in 2005, according to a report by the Spectrem Group. That represents a six-year decline of 13%, according to the study.
Even the workers who are participating are putting less money into the plans. The average percentage of salary put into 401(k) plans has gone from 8.6% in 1999 to 6.9% in 2005.
The reason for the waning interest in 401(k) plans could include a backlash to the technology collapse in 2000 or the low market-return environment, according to the study's authors.
"Workers appear to be losing their taste for 401(k) retirement savings," says George H. Walper Jr., president of Spectrem Group. "Declines of this magnitude could mean that many of today's workers will find themselves ill-prepared for retirement."

Dividends, Anyone?
Morningstar Inc. has launched an index that allows income-focused investors to prioritize dividend yield.
The investment research company has created the Morningstar Dividend Leaders Index, a diversified portfolio of the 100 highest-yielding stocks. The index will reflect companies that have a consistent history of paying dividends and the ability to sustain their dividends. The index favors companies that are expected to have enough future earnings to cover their dividend costs.
In a related development, Morningstar announced that First Trust Advisors L.P., an investment advisory firm in Lisle, Ill., has licensed the index to use it to launch an exchange-traded fund.
The new index will use MDL as a ticker symbol. It will be benchmarked against the Morningstar Dividend Composite Index, another new index that contains all dividend-paying stocks in the Morningstar US Market Index that meet the dividend consistency and sustainability screens. The Dividend Leaders Index consists of the 100 highest yielding stocks in the Dividend Composite Index, according to Morningstar.
"Our index is unique because we weight stocks in proportion to the dividends available to investors," says Sanjay Arya, director of Morningstar Indexes. "Both the amount of the dividend paid by a company and the size of the company are given due importance. Using available dividends helps avoid the investment capacity problems some other indexes face."

Most Older Boomers Lack Retirement Plan, Survey Finds
The lack of retirement planning on the part of affluent baby boomers continues to be an area of potential opportunities for advisors, according to a recent survey.
Continuing to drive home the message that has been sounded by similar studies the past few years, the survey by Phoenix Marketing International found that a significant number of baby boomers are headed towards retirement without the help of an advisor.
The survey found that among affluent baby boomers aged 50 to 59 with an average net worth of more than $1.7 million, not including primary residences, 62% do not have a written financial plan for retirement.
Among this same group, 27% have never met with a financial advisor to discuss their impending retirements.
Among younger affluent baby boomers, aged 41 to 49, with an average net worth of more than $900,000, 64% have no written retirement plan; 31% of this group has not met with a financial advisor.
Baby boomers comprise about 45% of affluent households, according to the study.
The survey is based on a survey of 1.083 affluent households in December.
"Affluent baby boomers have unique challenges when it comes to retirement planning and represent one of the largest opportunities for financial service firms," says David Thompson, Phoenix Marketing's vice president for affluent practice. "Mass marketing to this group of high-net-worth individuals simply doesn't work and requires a more thorough understanding of the affluent lifestyle, attitudes and behaviors. It's obvious from our research that there's lots of low-hanging fruit yet to be picked."

Make Up Your Mind
Experts seem to agree that the demand for financial advice is running high, but people's willingness to follow the advice may be another matter.
That was the message of a recent survey by ING in which a third of advisor respondents said that it's harder to give advice to clients today than it was five years ago.
Most of the respondents in this group, 90%, say that getting people to make decisions is the toughest part of giving advice. Meanwhile, 85% also said the difficulty is in convincing prospective clients that they need professional financial advice.
Overcoming people's lack of interest in and intimidation about financial planning were also cited as factors.
One of the survey's conclusions was that advisors and financial service companies need to make their solutions easier to understand.
"People are still intimidated by managing their finances, or just aren't interested in taking action to ensure a secure financial future," says Toby Hoden, chief marketing officer for ING U.S. Financial Services. "If we can make financial services easier, perhaps more people would be more engaged in the process."

Most Americans Don't Plan On Leaving Inheritances
    The offspring of today's American worker had better not be counting on living off an inheritance, according to a new survey.
AXA Equitable Retirement Scope, the company's second annual global survey, found that only one out of three American workers expects to leave an inheritance to family members-and that the rest expect to spend all they have during retirement.
People already in retirement leaned more toward giving, with 40% saying they are setting aside assets to pass down and another 14% considering the possibility.
The authors of the survey say this isn't a case of greed or stinginess, but of workers feeling insecure about their financial situation. Just under 65% of the nation's working respondents say they will rely on their own savings and sources other than Social Security or corporate pensions in retirement.
"This survey data speaks volumes about how Americans-millions of whom are on the brink of retirement-are feeling about their level of financial preparedness for this next life stage," says Ken Gelman, AXA Equitable's vice president and director of market research. "Their views on this matter are not reflections of greed or even disregard for descendants, but instead insecurity about their ability to simply provide for themselves-let alone their heirs-in retirement, given uncertainty about Social Security and pensions."

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