Retirement plan investing

Retirement plan investing

Clemmer, William A


The future looks brighter

There are three critical ingredients to every successful retirement plan:

The Plan

The Employee

The Investment

This column concentrates on “The Plan,” because it is the part of the program that is easily and often misunderstood. While legal in nature, and defined by statute, the Plan needs to be similarly understood by the agent/planner, the employer, the participant, and administrator. When regulations change, as they have again this past year, every plan needs to be reviewed and updated. Participants change-age, marital status, family status, employment and knowledge. The Plan may need to be modified to meet the new real or perceived objectives. Employers may change or add plans for a variety of reasons– average age of employees, plan costs, investment results, mergers or acquisitions-just to name a few.

A Plan is created for the benefit and protection of “The Employee”-his or her retirement income security. Congress made this clear with ERISA-the first word of which is “employee.” Every action for and about a retirement plan is done with a wary eye on the Act (ERISA), and the IRS and the Department of Labor who are charged with its implementation. One way or another, ERISA provisions may apply to nearly all “funded” plans, whether or not qualified.

Yet no plan is complete without “The Investment.” Investments provide for retirement income. The level of retirement income and often the degree of retirement freedom will depend on the performance of the investment. As a result, ERISA and other statutes provide direction for the management of the investment. Perhaps, one of the best known is the “prudent man rule,” which requires that investments be managed as they would by a “prudent man.” Nevertheless, within the rules and regulations, there is a broad freedom of movement to meet objectives (which must also be set in writing, under the statute).

From the participant’s point-of-view, the objective is to set aside a pool of assets that can provide an adequate retirement, notwithstanding inflation. This pool needs to increase to provide for increased needs, wants and expectations. This gain can come from capital appreciation or interest.

Buy low, sell high

Buying low and selling high is the goal of every financial advisor and investor. Profits are the main motive, but retirement comfort is also dependent on it. With a lower share price, one receives more shares for the same investment. With more shares often come more dividends. As interest rates increase, the return increases. The combination is the portfolio return.

The best of all worlds would be for the market to be low every time one invested in his or her retirement account and high each time a retiree made a withdrawal-and for interest rates to stay high with no inflation. Since that’s not possible, we think about ways to make the market work for us … and our clients.

Many retirement plans have felt the result of lower market valuations over the past couple of years. In reality, however, this has primarily affected only those who have had to sell shares recently The other problem has been the plan of the failed company that held that company’s stock-that is now worthless.

Many retirees have been hit hard and many soon-to-be retired are uncertain and distraught. With interest rates down, interest income is lower. For those using the sale of equities for income, more shares have had to be sold to maintain the same level of income. As more shares are sold, fewer shares are available to participate in any future market rise. For those depending on stock that’s worthless, even low interest returns are preferable. Historically, many companies will come out of bankruptcy and rebuild some of the values lost. (Enron and Chiquita filed for “protection” under the bankruptcy laws to do just that. Both have value. The question is how much, how soon, or if ever.) Removing the same number of shares each period during retirement is “dollar-cost-averaging” in reverse– dollars in, shares out.

During 2001, after the highs of May 21, we watched the market drop (as measured by the DJII) to an intraday low of 7,926 on 9/21/01(even then it closed at 8,235). We could not have known on that date that the next weeks and months would have been a wonderful time to invest.

What does it mean?

It means that the many investors who “stayed the course” (did not sell out) are breathing easier. (Recent data suggest that individual and mutual fund investors did not sell, but in fact, invested heavily.) It means that those who invested since then are likely seeing gains, even quite healthy gains, in their accounts. It means that once again, mutual funds and, in some cases, annuity contracts, with their diversification, professional management, flexibility, daily pricing and liquidity, have delivered pretty much as promised.

The slowing economy, and attendant lower interest rates, as noted, have had a negative effect on some. While this probably does not mean that they should immediately convert all their bonds into stocks, it does suggest that balanced portfolios should be considered.


Analysts and pundits are saying, the days of 20% gains are over. One should expect returns of 10-12% in the coming year.” Let’s put that in perspective. With the Dow at just under 10,000, all we need is an average net gain of 100 points a month (or 1%) to reach that goal. With this in mind, perhaps we can be a bit patient with the daily or even weekly mood swings (oops-market swings) we’ve been seeing. Finally, the correction in the market has resulted in lower share prices, which will result in more shares for equity investors that reinvest their dividends.

The recession is expected to be shallow. Today’s historically low interest rates, a lack of inflation, low energy prices, and Washington’s aggressive fiscal policies (Fed fund rates, tax bills, proposed stimulus package) all bode well for the economy. When the Labor Department reported that the third quarter rise in worker productivity was up a surprising 2.7%, John Manley (Salomon Smith Barney) said: “Yes, there is no great Depression to recover from, and there is no World War II to place America in a prominent position. But productivity continues to rise, and as long as that is the case, profits will grow.” Lincoln Anderson (LPL Financial Research) said, “The pace of innovation is so fast and its ability to deliver cost savings and new production so great, that I see things accelerating for some time.”

The market strategy committee of the Investment Advisor recently issued its 2002 forecasts. This committee includes seven well-known and broadly diverse investment analysts.


Add to this the continuing pace of globalization. “The opening of markets, continued deregulation, and globalization are enormous stimuli for the American economy,” says Gary Thayer (A.G. Edwards). Just imagine if only a tenth of the people in China, Latin America and Africa buy Intel chips and Ford cars. (India is already there.) Already, customer service calls for a major Midwestern insurance company are routed to India.


We should think about isolationism (as a result of terrorism), protectionism (for our businesses) and paternalism (in our foreign policy and international affairs). Such responses could slow our progress and delay visions for the future. Yet, the “prudent man/woman” will carefully weigh all aspects of clients’ needs, wishes, and expectations as investments are recommended and reviewed-as life changes affect life needs.

Investments are important

Investments will be an important ingredient to the preand post- retirement plan. Professional management of these assets will be critical. With some 10,000 or so mutual funds available, larger and smaller combinations are possible. Analysis software is an effective tool for plan design, asset allocation and effective review. Availability of the Internet and investment Web sites encourage client participation in the process. Families of funds and wrap programs allow for cost– effective changes and easy portfolio modifications.

A person, or team of people, is necessary to manage all the aspects of the corporate and individual retirement program. The events of September 11 and the weeks following demonstrated the importance of the trusted advisor as more than just a technician. As important as the Plan is, the participating employee has the highest expectations of the Investment. The advisor/agent who understands and meets the client’s needs and expectations in a rapidly changing world is seen as truly value added.

By William A. Clemmer & Gary S. Lesser, Esq.

The authors

William A. Clemmer and Gary S. Lesser, JD, head up Financial Services Agency Consulting (FSAC), a division of The Rough Notes Company. Clemmer has more than 25 years of financial services industry experience on Wall Street. Lesser writes and lectures widely on retirement planning and taxation issues. He is a member of the board of advisors for the Journal of Taxation of Employee Benefits.

Copyright Rough Notes Co., Inc. Feb 2002

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