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I wish to begin by thanking you for setting aside time for this presentation, which will describe in detail the main features and benefits of your company's 401(k). My name is Jim Gilbert, and I have been helping people understand and use 401(k) plans since their inception in the early ‘80s. Over the years tens of thousands of people have heard this presentation, and collectively they have saved in excess of $100 million for their retirement years, while enjoying powerful, on-going tax benefits along the way.
Now, about this program. It's divided up into two basic parts. The first part of this program concentrates on the core features of the 401(k). Things such as the 401(k)'s historical background, tax savings benefits, contribution limits, 401(k) loans, and other important aspects of the plan. Some of this information will seem routine for those who have been in 401(k) s previously. But, there are significant differences between your company's 401(k) plan and the typical run-of-the-mill 401(k) found. Elsewhere and we will take the opportunity to highlight these differences.
The second part of today's program will be devoted to investments and investment strategy. This will be very important information to cover, because with your company's 401(k), unlike many others, offers you a broad spectrum of mutual fund investment choices. And with that, let's get started...
SLIDE 1: 401(K) AND YOU
The 401(k) was established by the federal government in 1974 as a way for employees to set aside some of their earnings to supplement their retirement savings. In the eyes of the government the 401(k) is a retirement savings program, plain and simple!
But I can tell you from my own experience working with thousands of 401(k) participants since 1982, the vast, vast, majority of people join 401(k) s because they get significant and ongoing tax benefits. It's the tax benefits, which I will describe later in the program, that drive the 401(k) machine.
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).
SLIDE 2: YOUR 401(K) IS COMPLETELY VOLUNTARY!
Each person can decide whether or not to join. If you decide you don't want to join now, you can join later in the year. Or if you join now and later decide to cease participation, the choice is yours.
And new employees can join the 401(k) immediately after completing a minimal waiting period. The plan is very, very flexible.
SLIDE 3: FLEXIBLE FINANCIAL PLANNING
Your company's 401(k) is designed so that each person can determine for him or herself how much money, on a pretax basic will be set aside in the 401(k). each eligible, full-time employee can set aside anywhere from 1 to 15 percent of his or her pre-tax pay in the 401(k), up to a federally established limit which is currently set at $ 10,000 per year.
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.
SLIDE 4: 401(K) MAKES SAVING MONEY EASY
How does the 401(k) help you save? Simple; the 401(k_ is an automatic savings deduction program; money goes into the 401(k) through the payroll department before it shows up in your paycheck and before you have a chance to spend it! This is a great benefit for people who have trouble saving money.
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.
SLIDE 5: MONTHLY 401(K) STATEMENTS
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, and 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 day 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 slide.
SLIDE 6: THE AUTOMATIC IRA ROLLOVER
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 an 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 investment 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 slide.
SLIDE 7: AUTOMATIC IRA ROLLOVER'S GREAT ADVANTAGE
This graph illustrates what may prove to be greatest advantage of the Automatic IRA Rollover. Today this advantage may be 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've 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.
SLIDE 8: 401(K) LOANS (VERSION #2 ONLY)
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 details.
Let's begin this discussion of 401(k) loans with a warning. 401(k) loans are usually not in the borrower's 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 ore 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't 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 100 years to repay the loan.
There is an interest rate attached to the loan, but interestingly, the interest you pay goes right back into you 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 you 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 an 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 loans 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.
SLIDE 9: TAX SAVINGS!
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 60 cents is your money, and the remaining 40 cents is money that otherwise would be forfeit, and paid out to the 401(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....
SLIDE 10: SEAN PENN'S W-2
You are now looking at a standard W-2 form. This is an old one form 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 of 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, 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 had to save on taxes!
And now let us go to the second of the two tax benefits of 401(k) participation.
SLIDE 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 slide.
SLIDE 12: TAX DEFERRED ADVANTAGE!
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, your 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 off 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 then, perhaps double, the value of the XYZ Total Return Fund you hold outside you 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 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 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 ready to retire and start tapping into 401(k) IRA Rollover, you simply call the mutual fund and tell them 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.
STOP TAPE AND DISTRIBUTE ENROLLMENT FORMS
SLIDE 13: INVESTMENT INFORMATION
Please open your enrollment envelope and take out only the 401(k) ENROLLMENT FORM. We'll 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 willing 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.
SLIDE 14: 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.
SLIDE 15: DIVERSIFY YOUR INVESTMENT SELECTIONS
The first principle of good investing is to diversify your 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 are 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.
SLIDE 16: SELECT INVESTMENTS THAT FIT YOUR PERSONALITY, GOALS AND TEMPERMENTS
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 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 that 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 has been ordered by your employer and is 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've 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 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!
SLIDE 19: MAINTAIN A LONG-TERM PERSPECTIVE
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.
SLIDE 22: PENALTIES
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 ½. 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 ½ before you can take money out without penalty.
Now, you can, it your plan permits, borrow from your 401(k) for a family need, and there's no penalty associated with borrowing, so long as you pay the money back according to the terms of loan. But if you physically take the money and use it before 59 ½ you will be, in most cases, subject to the following:
Physical extraction of money from your retirement plan prior to age 59 ½, 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 you spend before your 59 ½ 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 ½. 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 an 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.
401k Slide Show
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