Conducting a plan investment review is an important part of sponsoring any retirement plan. A review can provide your firm with a valuable opportunity to review key areas, and to help ensure that every area is operating efficiently and also you are providing a compelling retirement plan benefitting your plan participants.
Q.1. Discuss the types of questions that a plans sponsor should ask during the design, implementation, and monitoring phases of the development of plan investment provisions. Please provide an explanation of why asking the question is important. Bring in supporting references where needed.
A.1 These days people are living their lives attending their busy careers and pursuing their passion and interests. With minimum time of investment and resources, there are many investment plan sponsors who are offering various plans to their clients with discipline and convenience. The plan brings discipline to your investment plan. It helps you choose the plan that is expected to achieve goals. (“Carlson B.”, 2008) During implementing strategies and development plan, there are certain questions that come up such as: What makes this investment plan unique? What is the organization’s investment approach? What is the objectivity behind this investment plan? What about the returns? How is the plan categorized- Is it a saving or investment plan? Are the planners involved in the investment decisions? How are the planners compensated? What services will be the planner receiving upon taking the plan? Will the plan allows receiving periodic withdrawals regularly? What are the pre-requisite to get started? .(“ Sivy M.”, 2011)
Q.2 Discuss how the employers can encourage employees to use a wealth management approach in planning a retirement?
A.2 By empowering employees to take control of their own retirement planning, pro-active employers are offering various benefits, and offer higher contributions. Employers have an obligation to provide employees the information about planning the retirement, but are restricted from giving direct advice. Qualified employers sponsored retire management plans provide numerous non-taxable benefits to the employees. Many defined wealth management plans allow their employees to comply some part of their salaries into the plan. Deferring part of your compensation can significantly lower your current taxes. The greatest way to optimize the retirement plan is that you as an employer should be educating your employees by helping them contribute as per their salaries. The plans should be effectively balancing the ratio between their salaries and investment money. If the salary increases, so should the contribution level. The potential opportunity for the growth is if the money stayed in the plan, it will continue to grow tax deferred. The results are clearly seen and those are increased loyalty, employee satisfaction and retention.(“ Sivy M.”, 2011)
Q.1 Identify three major areas where plan investment provisions should be compatible with plan sponsor objectives.
A.1 Looking at the plan administration, design and recording keeping the three major areas where the investment provisions and sponsor objective should be compatible are: Understanding each element in the plan’s fee and annual breakdown, Financial market updates, and Plan statistics and sponsor services. If managed wisely, these major areas of plan investment provisions can enrich people’s lives, and enhance organizational performance. These diversities enables to balance the sponsor objectives in terms of reward potential, risk acceptance, and time involvement, whilst providing on going assistance to developing business. If the plan is successful than it is likely to develop sufficient fund on its growth
Q.2. What are the disadvantages to using employer stock as an investment option in a defined contribution plan?
A.2 The Company issues certain number of shares to its employees as one of their investment provisions. However; there are certain disadvantages to use employer’s stock as an investment option for various reasons such as at times the company management encourages the employees to take high risk, in case of unstable company there are chances of collapse in the rates. Also; there is a risk of frequent tax law changes. The employees have to pay the taxes for it based on the value at the time granted. Furthermore; certain companies are offering stocks to the selected employees only, this gives a take away feeling that create a sense of caste system developing within an organization. (“Smart Money”, 2011)
Q.3 What are the three continuing stages in the development of plan investment provisions?
A.3 Different investment plans have different aptitudes and attributes. Hence; there are different stages involved in the development of plan investment provisions. Some changes with the effect of market trends whereas some are continued to the next level. The three continued stages that are carried on and are necessary to watch out for during any development of plan investment provisions like Improving the investment process, Assets tracking, Determining costs, benefits, risks and finish assessment. This helps in identifying the finances, know-hows of marketing, technical expertise and business models. Once integrated, the enterprise succeeds in becoming established name in their domain. (“United States Department of Labor”, 2011)
Q.4 Describe the difference between active and passive investment management styles?
A.4 There are many people that are not even aware of the difference between these two investment types. It stands to reason that you should choose the type of investment that serves the purpose.
A passive investment management focuses on reducing costs. It attempts to generate returns that matches the returns of the given benchmark index. The return tends to be lower than the benchmark because of the cost associated with the trading.
An active investment management focuses on beating the market. It will try to generate an investment return that exceeds the returns for the provided benchmark index. By picking the correct investments, managing risks and taking advantage of the market trends it can generate you greater returns.
Ultimately, the choice should be determined by the investor’s goals and personal preferences. (“Smart Money”, 2011)
Q. 5. What is a wealth management?
A.5 Wealth management is a financial services concept that has emerged to offer specific offerings during the decade of 90s. Usually the firms that offer wealth management packages offer wide range of financial services ranging from asset management to private banking. The use of wealth management is helpful where a person amasses large amount of assets and requires assistance in managing them effectively. One of the most famous aspects of the wealth management package is manage tax planning and managing investments which is associated with the task. The packages are best for those who do not want to get into the complexity and would like to spend their time in other issues than dealing with finances. (“United States Department of Labor”, 2011)
Q.6 What is meant by implicit after-tax return?
A.6 In theory, it is the reduction in the return on the tax favoured investment. It applies when the investors face taxation on their returns, arbitrage by the marginal clientele equalizes after tax returns for various assets leading to different pre-tax returns is known as implicit after tax return. (“Carlson B. “, 2008) For your 2 investment of equal maturity and risks, your after tax returns must be the same. It not then, the investment with the lowest return will be shunned, and everybody will be buying the investment at the higher return causing the pre-tax returns to adjust until the after tax return are the same. (“Smart Money”, 2011)
Q.7 Why it is difficult to determine the optimal positioning of assets within retirement savings plans?
A.7 The retirement savings plan is something that should not be overlooked. If you start filling it with a specific amount each month, then it is possible that you will be capable to build your nest through the composite interest. However one finds it difficult in determining. The trick is to find which particular financial asset should put to optimal use. That is when you require developing an appropriate plan that calculates optimal positioning of your assets. Optimal positioning of assets is just another fancy term of a pie chart that helps determine what percentage of your money should be in bonds, stocks, real estate and other financial assets. The financial planning process helps you in determining the most appropriate financial allocation for your assets with respect to your long term financial needs, and tolerance risks. (“Smart Money”, 2011)
Q.8 What is the functional approach to employee benefits, and how does it apply to individuals planning for retirement?
A.8 Retirement planning is an important part of your overall financial plan. Strategies should be designed in a way that suit your comforts and goals as well as to take advantage of tax saving opportunities. Consider using one or more of the following approach to maximize your retirement benefits such as Invest to earn higher rate of return on investments, Maximize your contributions to qualified retirement plans, Retiring at a later age, Save more and Spend less during retirement. Additionally; with various retirement plans such as SEP, Profit sharing, Money purchase plan, SIMPLE etc. that lets your investment grow tax deferred until you begin your withdrawals. (“United States Department of Labor”, 2011)
1. Sivy M. (2005). Investing strategies for retirement. 10 October 2005. Retrieved from web. http://money.cnn.com/2005/10/07/retirement/dreamretire_pay_0511/index.htm
2. Smart Money (2011). How to invest for retirement. 18 May 2011. Retrieved from web. http://www.smartmoney.com/invest/strategies/how-to-invest-for-retirement-1304670365583/
3. United States Department of Labor (2011). What you should know about retirement plan. 8 August 2011. Retrieved from web. http://www.dol.gov/ebsa/publications/wyskapr.html
4. Carlson B. (2008). Why most retirement investment plans are wrong-Part I. 24 October 2008. Retrieved from web. http://www.investorsinsight.com/blogs/retirement_watch/archive/2008/10/24/why-most-retirement-investment-plans-are-wrong-part-i.aspx