Our director of financial planning answers your portfolio questions.
By Sue Stevens, CFA, CFP, CPA | 03-21-02 | 06:00 AM | Email Article

I love hearing from so many of you. Don't be disappointed if I can't get to every e-mail or letter you send, but I'll answer as many as I can. Here's what's on your mind now:

Sue Stevens, CPA, CFP, MBA, and CFA Charterholder, runs her own financial planning firm, Stevens Portfolio Design, and manages over $100 million in assets.

Hidden Fees in 401(k) Plans
"How can you keep from getting ripped off in your 401(k) plan? I was invested in a plan where my funds went negative even though I was 100% invested in a money market fund! Seems they had some hidden fees there. I was told by the plan’s administrator that since I was investing more than most participants (20% of my salary), I was being charged more fees. This is just the opposite of the practices of most investment firms. Despite many inquiries on my part to the plan administrator, I have yet to be informed of the formula they use or even the amount they charged me.

"Worse, before enrolling in the plan, a representative told us during an enrollment seminar that the mutual funds in the plan were no-load. Later, I found that almost all the funds had 12b-1 fees of 1% or higher. All the funds were dogs too--no index funds, no large-cap funds that could serve as a core holding.

"What’s wrong with these people? Seems they don’t have any pride or value their reputation. Think of all the retirements they are ruining with their greed! What governmental body can I file a complaint with?"

Unfortunately, we hear more and more every day about abuses in company retirement plans. But you can speak out and let your opinion be known.

Company retirement plans are governed by ERISA (the Employee Retirement Income Security Act). As fiduciaries of the plan, your company retirement plan officers are required to act in the plan participants’ best interest.

I’d start by getting some of your colleagues together to sign a petition and present it to the company retirement plan officers (or board of directors for the plan). You can be very specific about your grievances and perhaps even offer some solutions.

Do your homework. Where would you like your plan to be held? If fees are a concern, perhaps a provider like Vanguard or Charles Schwab may be an alternative. Find out how these plans compare on performance, investment selection, fees, and service.

If that doesn’t get any response from the plan representatives, then you can contact the Department of Labor.

Bonds in My Portfolio?
"I’m 70 years old and a retired engineer. I just sold Fremont Bond Fund , which I held for five months and lost $4,000. I see that most ‘recommended’ portfolios include a portion of bonds increasing with one’s age. I am looking for some information on intelligent use of bonds in a portfolio."

A lot of people find bonds confusing. A good place to start is the Morningstar.com University page. We have an Investing Classroom that devotes a whole section to understanding bonds.

Fremont Bond fund is an excellent fund. You don’t say why you bought it or why you sold it. Five months seems like an awfully short holding period. I’d think carefully about your reasons for wanting bonds in your portfolio before you commit to something else.

Here are a few things to keep in mind. Interest rates and bonds have an inverse relationship. So when interest rates go up, the value of bonds go down (and vice versa). We’ve seen rates come down many times in the past year and a half. Most people think we’ll start to see them go up later this year.

The longer the maturity of your bond (or bond fund), the more it will be affected by a change in interest rate. One strategy would be to shorten up on your bond maturities right now (move from an intermediate-term fund to a short-term fund). Once interest rates come up, you can move out farther down the yield curve to intermediate maturities.

If you hold individual bonds, you may fare better than with bond funds. If you hold your bond to maturity, you’ll get the interest and the face value at the end. You won’t lose principal unless you sell before maturity. With a bond fund, you can lose principal.

Annuity in an IRA?
"I went to a financial planner, but I believe he gave me questionable advice. He advised me that I have too much cash (money market accounts). I agreed with his assessment, but question his suggested solution: Move my traditional IRA from the money market to something called an ‘equity-linked indexed annuity.’ I was under the impression that one of the advantages of a traditional IRA is the built-in tax deferral. If that is correct, why would I want to put my IRA into a tax deferred instrument?"

You wouldn’t. Find another planner. Be sure you know how they are compensated. For more on this topic, read "What to Look for in a Financial Advisor".

Some of you may be wondering, what is an equity-linked indexed annuity? It’s a type of annuity that gives you some participation in an up market while limiting your downside in a down market. But that peace of mind comes with a price. You may only get 40% to 90% of the upside of the market. And you may pay higher fees on top of it.

Annuities typically have higher expenses than an equivalent mutual fund. (That’s in part due to the insurance component of the product.) They also frequently have back-end surrender charges. If you want to move your money before seven years (or whatever the time period is for your annuity), you’ll pay a hefty toll.

You can find low-cost annuities at Vanguard, TIAA-CREF, and Fidelity (among others). If you are unhappy with your current annuity, you can make a "1035 exchange" and move your annuity to another company. (It’s very similar to an IRA rollover.)

You can purchase either a "fixed" annuity (which guarantees a certain rate) or a "variable" annuity (that allows you to invest in a number of underlying funds). You can also purchase an "immediate" annuity (that starts paying out right away) or a "deferred" annuity (that starts paying out later but keeps accumulating until that point).

My opinion is that there are specific situations where annuities may be helpful, but inside a tax deferred plan is never one of those situations. I would consider using an annuity for part of a retiree’s portfolio if that person wanted to be sure at least a part of their portfolio would pay out a guaranteed stream of income, much like a traditional pension.

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Sue Stevens, CFA, CFP, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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