Good morning.

As you've no-doubt noticed on your financial statements, the investment markets have continued their excellent start to the year.  The S&P 500 (large US stocks) is up more than 18% for the year.  International developed-market stocks are up more than 12%.  Emerging markets stocks are at approximately break-even year-to-date, as is the broad US bond market.  A nice start to the year for those of us with a broadly diversified portfolio!

Spring has been busy at Keener Financial Planning.  Megan and I have been joined by two new team members, Jordan Nightingale and Rachel Songer (intros below).  We've also moved our office.  We're just down the hall from my old office, and our suite number is still 108.  If you haven't met Jordan and Rachel in person or seen the new office, we'd love to have you drop by next time you're in the area. 

In this edition of the newsletter, we have information on how to identify the expenses in your 401k, the estate tax in 2013, how much an education is really worth, and more.

Please let me know if you have suggestions for newsletter articles or questions on your financial planning world.  And have a safe and happy Memorial Day weekend.  Thanks for reading, and Live Well!

Meet Jordan and Rachel

I am delighted to introduce our two new team members.

Rachel Songer joined the firm in February as a Planning Assistant.  Rachel has a Bachelor's in Financial Planning and works with Megan Horst to help you with scheduling appointments, making sure all your documents are turned in, investment paperwork, updating information in our investment and financial planning software, and more.  

Jordan Nightingale joined the firm last month as an Associate Planner.  Jordan is a Certified Financial Planner™ professional with 3 years' experience with a fee-only investment management firm.  Jordan has a Master's in Financial Planning and Bachelor's in Economics and is collaborating with me on developing financial plans and investment recommendations.

  401k fees are getting a lot of attention right now, and that's a good thing.  

Why should I care about plan fees?

In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the balance of your account.

Assume that you're an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $226,556 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $162,846. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.*

The following table demonstrates how varying levels of fees and expenses can impact the growth of a hypothetical 401(k) plan account after 35 years, assuming a $25,000 starting balance, 7% annual return before expenses and fees, and no additional contributions.

The first step is to become informed about the different types of fees and expenses charged by your plan, and the way they are allocated to plan participants. The best way to do this is to study the fee disclosure information that your 401(k) plan provides to you.  Last year, the law changed to require that your employer provides this information to you.

By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Your disclosure statement should clearly indicate the total annual operating expenses of each investment option. For example, in the case of a mutual fund, these operating expenses may include investment management fees and 12b-1 fees. These fees are charged against the assets of the fund and reduce the fund's total return. The annual operating expenses will be shown both as a percentage of assets (expense ratio) and as a dollar amount for each $1,000 invested. For example, a fund may have an expense ratio of 0.15%, or $1.50 for each $1,000 invested. In this case, $10,000 invested in the fund would cost $15.00 annually (10 times $1.50).

Your plan's disclosure material will also describe any shareholder-type (transaction) fees that apply to each investment option--things like sales charges and loads, withdrawal fees and surrender charges, and fees to transfer between investment options.

Your plan must also provide a chart that lets you easily compare information about each investment option. For example, if your plan allows you to choose among different mutual funds (or from different families of mutual funds), the difference in fees and expenses may help you choose between two or more funds that are otherwise similar in performance and investment strategy.

The day-to-day operation of a 401(k) plan also involves expenses for basic services--plan record keeping, accounting, legal and trustee services--that are necessary for administering the plan as a whole. Sometimes employers pay these expenses. Sometimes they're paid by the plan, and either allocated to all participants in proportion to account balances (that is, participants with larger accounts pay more of the allocated expenses) or charged as a flat fee to each participant's account. Your fee disclosure should contain an explanation of any fees and expenses that may be charged to participants' accounts. You'll also receive an explanation of any fees and expenses that may be charged to your individual account--for example, fees for taking out a loan or processing a qualified domestic relations order.

What should I do with all this information?

After you've identified what the costs are for each investment option, you can make decisions about how to build a diversified asset allocation in your account at the lowest possible cost.  If your plan is high-cost, you can also calculate whether the tax benefits and convenience of 401k contributions justify contributing more than the minimum necessary to receive full employer matching contributions.  In addition, you can make decisions about whether rolling prior employer 401k plans into your new plan or into an IRA is best for you long-term.

The Value of An Education

Now that college graduation exercises are upon us, you are no doubt hearing reports that young people matriculating from this or that prestigious alma mater are having trouble finding jobs.  The easy conclusion seems to be that a college degree doesn't matter very much anymore in the new economy.  But that, of course, is a short-term view; younger people have fewer job-related skills than people who have been employed for a few years, so they generally have trouble getting that first job no matter what their education level.

You can see this in the first chart below; older workers, who have presumably more experience in the workplace, tend to have lower unemployment rates than their younger competition.  A recession like 2008-2009 simply reinforced a long-term pattern; it made the jobs situation worse for everybody.  Today's difficult job market continues to allow employers to put a premium on experience.

Longer-term, however, a college degree does seem to confer huge advantages for getting employment.  Consider the most recent jobless statistics, broken down by education level:

Jobless rate for persons who have not earned a high school degree:  11.6%

Jobless rate for high school graduates with no college training: 7.4%

Jobless rate for persons with some college training or an associate degree: 6.4%

Jobless rate for persons who have earned a bachelor's degree or higher: 3.9%

Longer-term, as you can see from the second chart below, people who are educated at every level tend to be less likely to be unemployed than those with lower educational attainment.  The better-educated also tend to earn higher incomes over their lifetimes--the most recent statistics compiled by the Pew Research Center suggests that the average high school graduate with no further education will earn about $770,000 over a 40-year worklife, compared with $1.4 million for a worker with a bachelor's degree.

Parents reading this article, and graduates who are paying off enormous student loans, are no doubt wondering whether Pew was able to factor in the upfront costs of getting the college degree, plus the opportunity cost of four years (or more) spent on campus rather than in the workforce.  Even when these considerable costs are factored in, the net gain for a student who graduated from an in-state four-year public university is about $550,000 over a person's worklife.  

The third chart shows the various disparities in yearly earnings at different ages; you can see that at age 25, the differences are not huge, but over time, college education begins to create significant income separation.

Bottom line?  Ignore the gloomy reports of college graduates having trouble finding work. This has always been a problem, admittedly made worse by today's weak job market, but not an indictment of the value of a college education.  Education, as George Washington Carver once remarked, is still the golden key that unlocks the doors of opportunity.

Article adapted with permission of Financial Columnist Bob Veres.

Payable on Death Designation

A bank account can be designated as payable on death to someone of your choice. The bank pays these funds to this person almost immediately at your death, and the funds will generally not be subject to probate.

The payable on death designation is very simple and flexible. You can change the designation until your death, and the individual you designate has no right to the money until your death. Indeed, the individual will not receive the account unless he or she outlives you. A POD designation can also be used with U.S. savings bonds.

A typical bank account would be subject to probate at your death. Property subject to probate generally incurs fees, such as attorney's fees, and the transfer of probate property may be subject to delays of one to several years. A POD account usually avoids probate, and the named beneficiary can generally access the funds immediately after your death, without significant delays.

You do not make a gift for gift tax purposes when you name the beneficiary of a POD account. You remain subject to any income tax on funds in a POD account while you are alive. And funds in a POD account are still subject to estate tax at your death (see our article on the new exemption levels above).  

A POD designation can be a helpful estate planning tool for all the reasons described above.  However, you should be aware that your POD designation "trumps" whatever is in your will.  For example, suppose you have 3 children and your will specifies that each child receives 1/3 of your estate.  However, you name just 1 child as the POD beneficiary of one of your bank accounts.  Your other 2 children will not receive any of that account when you die -- it will all go to the 1 child named.  So if you use a POD designation, you need to make sure it's consistent with the rest of your estate plan.

A similar provision, transfer on death (TOD), is available for the transfer of stocks, bonds, and mutual funds to a named beneficiary at your death. 

Some material adapted with permission of Broadridge Investor Communication Solutions Inc.