What Your Company Forgot
To Tell You about Your 401(k)

Today's comment is by Larry Grossman, a long-time member of our Council of Experts, leading expert on retirement plan management, and Managing Director of Sovereign International.

Dear A-Letter Reader,

If your company is like most U.S. corporations, they forgot to tell you something very important when they were passing out the 401(k)s.

In fact, it's so important that I'd call it "a life changing event" and that's not a term I use lightly.

But I'll get to that in just a moment. First, let me briefly recap why properly planning your retirement has gotten even more critical lately.

Why Most Retirement Plans Are in Bad Shape

For starters, the first Baby Boomers just passed the "60" milestone birthday last year. This means the largest generation in the history of the U.S. is now approaching retirement age. And according to the statistics, most haven't saved enough - especially when you consider people are living longer these days. If you're 65, you have an 84% chance of reaching 85.

It is going to cost a lot more to live during your retirement than you think. With inflation, rising energy prices, healthcare costs, and a falling dollar, your "golden years" are getting more expensive by the day.

The aging boomers are the largest percentage of registered voters. This means this large chunk of the voting population will be petitioning Congress for higher social security, health benefits, etc. As a result, the government will probably raise taxes to meet their demands. If you're not currently ready for retirement, this means you will be losing more of your nest egg to taxes.

Why 401(k)s Can Be a Waste of Time

The sad fact is that 401(k)'s are just not as useful as they could be.

The investment options are pathetic. In fact, at least 99% of the 401(k) plans I have seen have artificial investment restrictions. Most investors also don't get enough advice about how to invest their 401(k) plans. Those who do receive advice generally receive bad advice. Not to mention, the fees are ridiculously high.

But fortunately, there are things you can do about your 401(k) to make it work for you.

For starters, there is no law that prevents you from having a self-directed option in your 401(k) plan. There is also no law that says you are limited to some predefined list of poor performing mutual funds.

New Pension Protection Act of 2006

The new Pension Protection Act (PPA) of 2006 specifically allows you to receive investment advice as a 401(k) participant from "a fiduciary advisor." The new PPA also says you can self-direct your plan.

The new PPA allows for computer model investment advice programs that take into account all relevant information about you as the participant and your wealth-building goals. It also factors in risk tolerance, etc. The full range of investments including stocks and bonds, and allows you flexibility in obtaining advice to select investment options.

The new Act mentions foreign currencies and foreign exchange transactions several times as they are related to purchasing investments.

So it's clear the new PPA is trying to encourage, if not outright demand that 401(k) plans offer a much wider range of investments. That's why it allows for individual investment advice and self-directed accounts. Why else would it include such language?

If I was your plan provider or administrator, I would really be sweating about now. Why? Because I forgot to tell you all these important stuff about your 401(k)! You see, most of the mandates in this new PPA always existed. But some plan administrators have taken the easy way out and have artificially prevented you from investing your account the way you want to (with appropriate advice and education of course).

So this begs the question, if I could invest my 401(k) like I wanted to, what could I do?

If the Sky's the Limit - What
Can Your 401(k) Invest In?

Well it is actually easier to start off by telling you what you can't do with your 401(k). Basically, you can't own certain collectibles, like a wine collection or antique cars, and you can't engage in what is called self-dealing. This includes owning the land your business is operating from. (As always, there are exceptions to these rules, see www.dol.gov for additional information on blanket exemptions.)

Let's start out with some simple examples.

You know all of those mutual funds in your plan with really high internal expense ratios? Did you know most of them exist as exchange traded funds (ETFs), but with very low internal expenses? That in and of itself could add between 1-2% a year to your return.

Want to reduce your exposure to risk? You can invest in principal protected notes that allow you to invest in many different market indices or even foreign currencies. With these notes, you have a guaranteed return of principal, plus all of the upside potential.

Think about how much wealth has been lost because of market fluctuation. If just 25% of your portfolio had the potential to go up in value with no downside risk, there would be significantly greater wealth in many people's plans.

Location, Location, Location

You can even use your 401(k) to invest in real estate.

Yes, I know the real estate bubble has burst. But eventually you may want to use your 401(k) to snatch up some of these properties at fire sale prices. You buy virtually any type of real estate with your 401(k) including raw land, apartment buildings, single-family homes etc.

Oh and did I mention it doesn't have to be just U.S. real estate? You could buy a piece of beachfront property in Mexico or a ski lodge in the Alps with a portion of your retirement plan.

And it doesn't stop there. You can protect yourself from the now plummeting dollar by diversifying your retirement plan into multiple currencies. You can do this by buying a Certificate of Deposit (CD) in another currency. Or you can just invest in other currencies.

The rules allow it, but your administrator hasn't told you yet. Have you always wanted a foreign bank account but you were worried about the potential tax problems? Yep, you guessed it, open it up in your retirement plan where it is legal and tax deferred.

A World of Exotic Investment Choices

Finally, for the sake of brevity, there are the world of exotic investments for those that qualify or are interested in things like managed futures, commodity trading advisors and hedge funds that you can use your retirement plan to invest in.

Once again, if you're a plan administrator, it is time to take a serious look at the PPA of 2006 and modernize your plan.

If you currently have an under-performing company plan, politely insist you have the right to invest your plan in a far more flexible manner than you have been allowed and suggest the company take steps in the right direction.

Please feel free to contact me with any additional questions or assistance.

LARRY GROSSMAN, CFP®, CIMA®
Retirement Expert & Managing Director of
Sovereign International
lgrossman@sovereignpensionservices.com
www.worldwideplanning.com
www.sovereignpensionservices.com

Something Is a Little Out of Whack

I think many would agree that currency rates and underlying fundamentals behind many of the major currencies are a bit out of whack these days.

But this is part and parcel to the offshoot characteristics in all markets, especially currencies. I say especially currencies because there are so many viable rationales competing for attention, and each currency trader who is riding the trend is very confident in either consensus or personal rationales. Until these rationales are shaken by real fundamental events, which often are recognized after the trend has already changed.

A third possible theme has emerged of late: Central bankers are intervening. They're selling euro to buy dollars (and maybe some yen while they are at it). This is because the euro is getting beaten from all sides. Why should euro manufacturers bear the brunt of currency imbalances they say? Good question, I say!

Three of the four major global exporters in the world are the U.S., Japan, and of course that upstart in the east - China. All three currencies are in the proverbial toilet compared to the euro. Now the U.S. economy is nothing to brag about, so maybe there is a lot of justification there. But Japan still has plenty of momentum, and that momentum may be because China continues to blow and go. Both currencies are HUGELY undervalued compared to the euro. Heck, they're even undervalued relative to the lowly dollar.

But, because I, like many others are already talking about intervention, it probably won't happen. I should say, happen at least yet. Maybe 1.50 on the euro will do the trick. And 1.50 on EUR/USD I don't imagine there will be any dollar bulls left to hope for the best.

JACK CROOKS, Editor of
World Currency Options

Privacy & Rights

Will the U.S. Really Create an "Exit Tax?"

Since 1996, there have been at least a dozen efforts by congressional tax-and-spenders to impose an "exit tax" on certain wealthy Americans. These Americans have exercised their constitutional right to disconnect from the U.S. tax system through a process called expatriation.

In most countries, all that's necessary to expatriate is to become nonresident. But in the United States, you need to also give up U.S. citizenship, because the U.S. Tax Code imposes tax on U.S. citizens living abroad, even if they've never set foot in the United States.

Since the United States taxes its citizens and not just its permanent residents, the only way for a U.S. citizen to eliminate U.S. tax liability is to acquire legal residence and citizenship in another country and subsequently give up U.S. citizenship.

Expatriation is politically unpopular. The vision of a pale ex-U.S. citizen-billionaire basking on a beach in a tax haven is too much for many less affluent citizens to bear. As a result, anti-expatriation rules penalizing U.S. citizens who are deemed to have given up their citizenship for tax avoidance reasons have been in effect for decades. First imposed in the 1960s, the rules were tightened in 1996 and again in 2004.

Now, Congress is again on the verge of passing an outrageous law that would impose the first-ever exit tax on former U.S. citizens or long-term residents (persons who have resided in the United States for eight years or more of the previous 15 years).

On October 10, the House of Representatives passed the Tax Collection Responsibility Act of 2007 (H.R. 3056). If passed by the Senate, and signed by President Bush, this act will require persons who give up U.S. citizenship or long-term residence to pay a tax on all unrealized gains of their worldwide estate that exceed US$600,000. The gains will be assessed based on the fair market value of the assets and the tax due within 90 days of expatriation.

This bill also imposes a draconian 30% withholding tax on unrealized gains in an expatriate's IRA or other pension plan. And don't think about gifting assets to family members or friends still living in the United States. A separate 30% tax applies to such gifts or bequests.

The conference report on this legislation smugly states that U.S. citizens can give up their U.S. citizenship, but that the Tax Code shouldn't provide an incentive to do so. Rather, that decision should be, in the report's words, "tax neutral."

Give me a break. Taxing expatriates on a phantom gain that could quite possibly be taxed again by whatever country to which they relocate is hardly "tax neutral." Especially when the only alternative to this "alternative tax regime" is to post a bond and pay an interest charge for the privilege of not paying tax on gains you never realized.

I'll be tracking the progress of this deplorable proposal as it makes its way through the Senate. There's a chance that President Bush would veto the bill, should it pass the Senate, but there's no assurance he would do so, since bashing wealthy expatriates is so popular.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

P.S. In the meantime, to get the full story on expatriation, click here.