Upgrading Your Retirement Plan
May Save You a Bundle!

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,

Apparently I struck a nerve with my last article here in the A-Letter, "What Your Company Forgot to Tell You about Your 401(k)."

Just in case you missed it, I explained why most individuals have more options with their 401(k)'s than they realize. I also explained how you can maximize your 401(k)'s potential - either with a self-directed option or simply by choosing more exotic investments.

Well since then, I've received lots of emails from readers asking about 401(k)'s. As you might expect, 99% of the correspondence came from 401(k) participants. These folks all want to invest more freely. That's because for years they've been limited to investing their hard-earned retirement funds in a company-chosen 401(k) list of plain-vanilla mutual funds.

The other 1% of responses actually came from companies who offer 401(k)'s. These companies were genuinely interested in changing their 401(k)'s, so they could offer more useful retirement vehicles to their employees.

I applaud all of you who are ready to upgrade your retirement plan to benefit your employees. And if you're considering an update, you should do it sooner rather than later.

If You Offer a 401(k), You Better Follow Their Lead

The times are changing. If you don't try to make your employee's retirement plan more useful, you could face some serious legal problems down the road.

For example, your employees could actually sue you because your retirement plan has hidden fees, exorbitant fees and or bad investment choices.

If you wait until there is an emergency (like a lawsuit), you could find yourself scrambling to update your plan. And if you're rushed, you won't be able to do the proper research. So inevitably you'll pick an inferior solution.

I'll explain more about that in just a moment.

"No, We Don't Allow That"

In response to my last A-Letter, several readers sent me copies of their 401(k) plans. It was very interesting reading for me. Many of these plans had virtually no investment restrictions. A number of them even stated that employees could choose a self-directed option.

But in every case, when these readers called their plan administrators to take advantage of these options, the plan administrator said "no, we simply don't allow this." No explanation. No reasons. Just: "no you can't."

One reader has even gone so far as to retain legal counsel to resolve the matter. He's planning to sue if his company refuses to let him choose investments outside of their standard mutual fund list.

Tell It to the Judge!

This past June, the Wisconsin federal courts heard a case involving a company's retirement plan. Employees of Deere & Co. filed suit over the lack of fee disclosure in their 401(k) plans. Specifically these employees were suing because of the revenue sharing arrangement between Fidelity Trust and Fidelity Research and their company's management.

I've been saying this for years: There are some dirty little secrets hidden away in your 401k plans. Often, there are undisclosed, (some might call them "secret"), fee sharing deals that benefit the mutual fund firms, and your employers - but not you. Basically, one hand greases the other hand in a variety of ways and it costs you as a 401(k) holder a lot of money!

It's the strangest thing to me. One of my companies is an SEC Registered Investment Advisory firm. And the SEC demands transparency from us and mandates full disclosure of our compensation and any potential conflicts of interest.

Well if I must show all my fees, (which I happen to agree with) why wouldn't all of the professionals handling your retirement have to disclose theirs?

The good news: Currently Congress is considering several bills that will force much greater fee disclosure. So hopefully, retirement firms will have to submit to the same level of transparency.

This is great if you hold a 401(k). As a participant, greater transparency means a reduction in fees (which drag down your retirement plan's performance) and possibly greater investment options.

Greater Transparency = More
Legal Issues for Providers

For plan providers it may open the door for increased litigation. Don't believe me? Check out www.erisafraud.com. You can review all the current cases about retirement plans.

And what are we seeing in these cases?

• a failure to manage plan assets
  
• monitor fiduciaries
  
• lack of transparency
  
• excessive fees
  
• engaging in prohibited transactions

I'm sorry but I seem to be missing something here. When I talk to someone who manages a company-wide 401(k) plan, they never tell me about their investment restrictions. In fact, they're always interested in the chance to self-direct their account.

What's Better for Your Employees
Is Actually Better for You

Truthfully why would companies refuse to let their participants invest in better investments? Even if it added some moderately greater administrative fee, wouldn't it be worth it if your employees could invest in whatever they wanted?

I would be willing to bet it actually would save money if you allowed your participants to use ETF's instead of mutual funds. You may have to charge your employees a higher fee so they can invest in such funds.

But who cares? It would be worth it to have greater investment access. Just ask your employees and see what they say.

Why Plan Administrators Aren't Doing This Already

One word: Liability. Many plan administrators are scared to death they will be held liable for fiduciary responsibilities. I have news for you: If you're a fiduciary, then you're already liable.

The Department of Labor has said that you can allow your participants to use fiduciary advisors to give them investment advice. (What would you need that for if they can only pick LC growth funds?) And if your company's employees are using qualified fiduciary advisors, then you'll have built-in protection from lawsuits for mismanaging investments.

More importantly, if you don't offer these options, your employees could sue you - and you could lose, big time.

Let me put this in perspective. One of the plans I reviewed recently only allowed participants to choose from 15 different large-cap growth funds. You call that a prudent investment portfolio? Yeah right.

If I was an attorney, I would stick an expert in modern portfolio theory on the stand and let them talk for a few minutes. Afterwards, the company would just have to write my clients a settlement check.

The bottom line: You should allow your employees to invest freely through fiduciary advisors if they choose. And be as transparent as possible with your fees. If you don't, you could face lawsuits in the future. Don't risk thousands in legal fees.

Change your plan now before you're sued, and the judge says you have to.

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

P.S. Want more retirement options? Click here to read more about what you can do with your retirement plan.

Investing in the "New Frontier" is Getting Closer

It's official. It's possible to invest in the "New Frontier" markets with a single fund.

The Morgan Stanley Frontier Emerging Markets Fund will shortly begin trading as an open-ended fund or Sicav in Luxembourg.

Although the fund is not available to U.S. investors, you can buy it through a third party, like a European private bank. But be warned: The IRS penalizes investors that invest in offshore mutual funds with ridiculous taxes. So I would suggest investing through a tax-deferred vehicle like an offshore annuity or offshore IRA.

If you'd rather not invest offshore, a New Frontiers exchange traded fund or ETF is coming to market in the United States later in 2008.

Morgan Stanley, whose MSCI unit pioneered global investing back in 1969, will base the fund on its constituent index of 33 markets. The regions include Eastern Europe, the Middle East, Asia, sub-Sahara Africa, Latin America and the Caribbean.

The MSCI New Frontiers Emerging Markets Index has blown away the S&P 500 Index since 2002 while sharply outperforming the MSCI Emerging Markets Index.

The Morgan Stanley Frontier Emerging Markets Fund will soon launch with US$500 million in assets. With this fund, you'll receive daily dealing in several share classes, including a retail share class.

Yes, this all sounds extremely exciting and potentially lucrative. But please remember these small and highly speculative New Frontier markets are very volatile. They've already raced to Mars over the last few years.

I would seriously await a mini-crash or worse before establishing a new position. But keep the new crop of Frontier Market funds on your radar, because over the next decade and beyond, these markets will probably outgrow other advanced emerging markets and draw a flood of investment management capital.

ERIC ROSEMAN, Investment Director

Currencies

Gulf Arab Nations Hang Onto
Their Dollar Pegs - for Now

The verdict is in. The GCC (Gulf Cooperation Council) just met and decided to keep their exposure to the U.S. dollar - for now. Until further notice, their currencies will still be based on the U.S. dollar's performance.

But this isn't the end of this debate. Kuwait said they would keep their currency pegged to the U.S. dollar. And then two months later, Kuwait traded in their U.S. dollar peg for a basket of currencies. Since then, inflation has been much easier to manage in Kuwait.

In my opinion, Kuwait was the "lab rat" for what is to come in all of the sheikdoms in the United Arab Emirates. For now, they'll say they're keeping their pegs. Then in a couple of months, they'll likely drop them. Inflation is just as rampant there as it was in Kuwait. So it only makes sense for them to follow suit and revalue their currencies too.

Here's another thought: If you were going to drop your dollar peg, would you tell everyone first? I don't think so. Otherwise, traders from all over the world would start selling dollars and make your situation even worse.

So what do you do? You tell everyone that you're keeping your peg for now and then de-link when everyone isn't expecting it. That way you haven't done any damage to yourself by having an even lower dollar rate when you de-link from it.

This is what I feel will happen in the upcoming months.

SEAN HYMAN, Currency Director

EDITOR'S NOTE: Want to know how to fight these globalized slams on the U.S. dollar? Check out our E-Letter, My Two Cents for some ideas. Sign up right now and receive this E-Letter - absolutely FREE. Click here to find out more.