Welcome H R Options 401k Plan back to
Welcome H. R. Options 401(k) Plan << back to website
Agenda § The Importance of Saving for Retirement § How Your Plan Works § Asset Allocation § Investment Options Under the Plan § Smart Investment Behavior (Building an Investment Portfolio) << back to website
Why Participate in Your 401 K? 100% • Male • Female • At least one spouse 78 75 50 81 Americans Are Living Much Longer! 86 85 88 91 25 0 91 65 years old 70 75 80 85 << back to website 90 93 96 95 100 105
Why Participate in Your 401(k)? Today’s workers (Expected sources of retirement income) Today’s retirees (Actual sources of income) 20% 36% 14% 43% 66% 20% • Social Security • Pension plans • Personal savings/other << back to website
The Effects of Inflation The Rising Cost of Postage 1983 -2010 29 ¢ 18¢ 25¢ 33¢ 15¢ 1983 1993 Source: United States Postal Service << back to website 2010 44¢
Advantages of Your 401(k) Plan? • Convenience – Automatically Done Through Payroll Deductions • Tax Benefits – Pre-Tax - Immediately lowers your taxable income. Result: Less Taxes Now! – After-Tax (Roth) – Contribution and growth not taxed with qualified withdrawal. Result: No Taxes Later! – Tax-Deferred Growth – No Taxes Paid on Growth Until Withdrawal. Result: Faster Growth! • Lower Cost • Employer Match!! << back to website
How Your Plan Works H. R. Options 401(k) Plan << back to website
Plan Details Eligibility: – You must be at least age 21; and, – You must complete 500 hours of service during the Plan Year. – You may enter the plan on January 1 st, April 1 st, July 1 st , or October 1 st coinciding with or next following the date you meet this requirement. << back to website
How Your Plan Works Salary Deferral Contributions – The salary deferral limit is up to $16, 500 – If age 50 or over, you may contribute an additional $5, 500 in catch-up contributions. – Your contributions can be Pre-Tax dollars, After-Tax (Roth) dollars or a Combination of Both (not to exceed the above limits) – You may change your deferral election anytime by visiting the recordkeeping website, www. Account. TRAX. com. << back to website
How is a Traditional 401(k) contribution different from the Roth contribution? • Traditional 401(k) contributions are Pre-tax dollars • Roth 401(k) contributions are After-tax dollars • Traditional 401(k) Deferrals Federal income taxes on the deferrals and the earnings to your account are postponed – You will pay taxes on any distribution (withdrawal) from your standard 401(k) portion of your account. • Roth Deferrals Contributions are taxed at the time they are contributed. – You will not be subject to taxation on these amounts as well as the earnings provided you receive a qualified distribution from your Roth account. << back to website
Roth vs. Traditional At a Glance Type of Account Contributions Earnings Withdrawals Traditional 401(k) Not Taxed at Withdrawal Taxed as current income Not Taxed Roth 401(k) (reduces current taxable income) Taxed as current income << back to website
Plan Details Continued…. Employer Contribution – HR Options matches the funds you save in your 401(k) account with $. 20 (twenty cents) on the dollar, up to 3% of compensation. – This matching contribution will be allocated to your account each pay period so you will be benefitting from dollar cost averaging throughout the year. << back to website
Plan Details Continued…. Vesting – Your 401(k) contributions are always 100% vested. – The employer matching contributions are also 100% vested. Rollovers – Rollovers from other qualified plans are allowed. << back to website
Plan Details Continued…. Withdrawals – Termination of Employment – Financial Hardship – Attaining age 59 ½ – Retirement – Disability – Death The following may apply: 20% Federal tax withholding and state tax withholding. Additional federal and state taxes may be due. Federal and state penalties may also apply to certain distributions. << back to website
How Your Plan Works (Cont’d) Accessing your account – Online access at www. accounttrax. com • Investor Questionnaire • Links to Morningstar. com • Personalized Rate of Returns • Retirement Calculator • Download Administration Forms & Documents including Summary Plan Description – 24 hour Voice Response Unit at 888 -401 -5629 – Quarterly statements will be mailed to your home address. You may also sign up for electronic delivery of this information with our e. Statements. << back to website
How to Enroll in the Plan Online Enrollment – Log onto www. Account. TRAX. com. – Input your Social Security # as your initial User ID and the last four digits of your Social Security # as you default Password. The system will immediately prompt you to change these security items after this initial log in. – Verify your Personal Information including home address. Input an e-mail address and answer the Verification Question. – Designate a Beneficiary (both primary and secondary) – Input your salary deferral amount. – Select your investments. – The sooner you enroll, the sooner your are on your way to meeting your financial goals! << back to website
What is Asset Allocation? Asset allocation is the process of combining asset classes in a portfolio to reduce volatility and potentially increase returns. Bonds Stocks Cash << back to website
Stocks, Bonds, Bills, and Inflation 1926– 2009 $12, 231 $10, 000 $2, 592 Compound annual return • Small stocks • Large stocks • Government bonds • Treasury bills 1, 000 • Inflation 11. 9% 9. 8 5. 4 3. 7 3. 0 $84 100 $21 $12 10 1 0. 10 1926 1936 1946 1956 1966 << back to website 1976 1986 1996 2006
Potential to Reduce Risk and/or Increase Return 1970– 2009 Fixed income portfolio Lower risk portfolio 15% 19% 37% 85% Return: 8. 0% Risk: 7. 8% 44% Return: 8. 0% Risk: 5. 8% Higher return portfolio 12% 27% Return: 8. 9% 7. 8% Returns above are annualized returns. “Risk” is standard deviation. Roughly 2/3 of the time, returns are within one standard deviation of the return number listed above. << back to website Stocks • Bonds • 61% Risk: • Cash
The Case for Diversifying 50% Return Compound annual return • Stocks • 50/50 portfolio • Bonds 40 8. 5% 5. 8 1. 9 30 20 10 0 – 10 – 20 Year 1 2 3 4 << back to website 5 6 7
Choosing Your Asset Allocation What To Consider – Personal Need, Willingness and Ability to take Risk – Retirement Time Horizon • How long until you retire? • How long will you be in retirement? – Expected Rate of Return • Risk Reward Trade-Off << back to website
Building An Investment Portfolio << back to website
Building an Investment Portfolio Investment Options Under the Plan << back to website
Building An Investment Portfolio Vanguard Target Retirement Funds § § § Vanguard Target Retirement 2015 Vanguard Target Retirement 2025 Vanguard Target Retirement 2035 Vanguard Target Retirement 2045 Vanguard Target Retirement 2050 These Vanguard funds invests in other Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire in or within a few years of the funds indicated year. << back to website
Target Retirement Glide Path Asset Allocation Funds (Age Based) << back to website
Building an Investment Portfolio Balanced Fund T. Rowe Price Capital Appreciation • Seeks long term capital appreciation. • Invests approximately 60% of assets in equities (stocks) and 40% of assets in debt securities (bonds). • Suitable for a moderate investor. << back to website
Building an Investment Portfolio Stable Value Fund Wells Fargo Galliard Stable Value • Seeks to provide current income while maintaining liquidity and a stable share price of $1. • Invests primarily in high-quality, short-term money market instruments. << back to website
Building an Investment Portfolio Bond Funds Vanguard Intermediate-Term US Treasury • Seeks to provide a moderate and sustainable level of current income. • Normally invests at least 80% of assets in U. S. Treasury bills, notes and bonds issued by U. S. Treasury. Vanguard Inflation Protected Securities • Seeks to provide inflation protection. • Invests in inflation indexed U. S. government bonds. << back to website
Building an Investment Portfolio Bond Funds- Cont. PIMCO Total Return • Seeks total return consistent with preservation of capital. • Normally invests at least 65% of assets in debt securities, including U. S. government securities , corporate bonds, and mortgage-related securities. Mainstay High Yield Corporate • Seeks total return consistent with preservation of capital. • Normally invests at least 80% of assets in high yield bonds. << back to website
Building an Investment Portfolio Domestic Large Company Funds Vanguard Windsor II • Seeks long-term capital appreciation and income. • Invests mainly in mid- and large-capitalization companies whose stocks are considered by an advisor to be undervalued. Vanguard 500 Index • Seeks results corresponding with the total return of common stocks represented by the SP 500 index. • Normally invests at least 80% of assets in equity securities of companies included in the index. << back to website
Building an Investment Portfolio Domestic Large Company Funds cont’d American Funds Growth Fund of America • Seeks to provide long-term growth of capital through a diversified portfolio of common stocks. • Invests primarily in common stocks, convertibles, preferred stocks, U. S. government securities, bonds and cash. • May invest up to 10% of assets in debt securities rated below investment grade. << back to website
Building an Investment Portfolio Domestic Mid-Sized Company Funds Janus Perkins Mid-Cap Value • Seeks long-term growth of capital and income • Invests mainly in the stocks of medium size U. S. companies, choosing stocks considered to be undervalued and trading at prices that the advisor feels are below average. Vanguard Mid-Cap Index • Seeks to track the performance of a benchmark index that measures the investment return of mid-capitalization stocks. • It attempts to replicate the target index by investing all, or substantially all, of assets in the stocks that make up the index. << back to website
Building an Investment Portfolio Domestic Mid-Sized Company Funds-Cont. Baron Asset • Seeks capital appreciation. • Invests in common stocks of middle sized growth oriented companies. << back to website
Building an Investment Portfolio Domestic Small-Sized Company Funds Royce Pennsylvania Mutual • Seeks long-term growth of capital. • Invests at least 65% of assets in the equities of small- and micro-cap companies. T. Rowe Price New Horizons • Seeks long term capital growth. • Invests in a diversified group of small, emerging growth companies. << back to website
Building an Investment Portfolio International Funds American Funds Euro. Pacific Growth • Seeks long-term growth of capital. • Primarily invests in securities of issuers located in Europe and the Pacific Basin. • Designed for investors seeking capital appreciation and diversification through investments in stocks of issuers based outside the United States. << back to website
Building an Investment Portfolio International Funds – Cont. Columbia Acorn International Select • Seeks long term capital appreciation. • Invests in middle to small sized companies outside the U. S. that are considered growth oriented. << back to website
Building An Investment Portfolio Sample Portfolio – Moderately Aggressive • • • Cash 5%: Wells Fargo Galliard Stable Return Bonds 15%: PIMCO Total Return Large Company Stocks 35%: Vanguard 500 Index Mid-Small Company Stocks 20%: Vanguard Mid-Cap Index(10%), T. Rowe Price New Horizons(10%) International Stocks 25%: American Funds Euro. Pacific Growth (20%), Columbia Acorn Intl Select (5%) << back to website
Building An Investment Portfolio More Funds Does Not Always Mean Greater Diversification! Equity portfolio A Deep-value Giant High-growth Large Core-growth Mid Blend Small Core-value Micro Small Mid Large Giant Deep-value Equity portfolio B << back to website Core-value Blend Core-growth High-growth
Dos and Don'ts of Smart Investing • Don’t Try to Time the Market • Don’t Be Too Conservative • Diversify, Diversify • Contribute Regularly • Re-Balance • Navigate the Noise << back to website
Smart Investment Behavior: Don’t Try to Time the Market! $6 $4. 84 Hypothetical value of $1 invested from 1990– 2009 $4 $2. 04 $2 $0 S&P 500 $2. 12 S&P 500 minus best 10 months Treasury bills << back to website
Smart Investment Behavior: Don’t Be Too Conservative! (After Taxes) $1, 000 $510. 68 Compound Annual Return • Stocks • Municipal bonds • Government bonds • Inflation • Treasury bills 100 7. 7% 4. 4 3. 0 2. 3 $36. 22 $15. 96 $12. 05 10 $6. 51 1 0. 10 1926 1936 1946 1956 1966 << back to website 1976 1986 1996 2006
Asset-Class Winners and Losers 1995 Highest Return Large Stocks 37. 6% Large Stocks 1997 Large Stocks 1998 1999 2000 2001 Large Stocks Small Stocks L/T Govt. Bonds 21. 5 Small Stocks L/T Govt. Bonds Small Stocks Intl Stocks L/T Govt. Bonds Intl Stocks 22. 8 17. 8 60. 7 20. 7 14. 0 26. 9 11. 6 25. 9 32. 5 T-Bills Intl Stocks Small Stocks L/T Govt. Bonds T-Bills Small Stocks 5. 9 3. 8 1. 6 39. 2 18. 4 9. 9 1. 6 Large Stocks Diversified Portfolio 5. 5 – 20. 7 Diversified Portfolio Small Stocks 23. 0 33. 4 28. 6 29. 8 Small Stocks Intl Stocks 34. 5 17. 6 22. 8 20. 3 27. 3 L/T Govt. Bonds Large Stocks 13. 1 21. 0 L/T Govt. Bonds 31. 7 Diversified Portfolio L/T Govt. Bonds 10. 3 15. 9 Intl Stocks L/T Govt. Bonds 23. 8 6. 4 15. 9 12. 2 14. 3 – 3. 6 – 0. 8 Intl Stocks T-Bills Large Stocks 11. 6 5. 2 5. 3 4. 9 4. 7 T-Bills L/T Govt. Bonds Intl Stocks Small Stocks L/T Govt. Bonds 5. 6 – 0. 9 2. 1 – 7. 3 – 9. 0 Diversified Portfolio Lowest Return 1996 Diversified Portfolio 0. 6 3. 7 Small Stocks Diversified Portfolio – 9. 1 Intl Stocks – 14. 0 2002 Diversified Portfolio – 6. 5 Small Stocks Large Stocks 28. 7 Diversified Portfolio 2004 Diversified Portfolio 12. 0 Large Stocks 24. 8 10. 9 Intl Stocks L/T Govt. Bonds – 11. 9 – 15. 7 Intl Stocks Large Stocks – 21. 2 – 13. 3 2003 – 22. 1 2005 7. 8 Diversified Portfolio 7. 3 Small Stocks 2006 16. 2 Large Stocks 15. 8 Diversified Portfolio 2007 2008 2009 28. 1 Large Stocks 26. 5 Diversified Portfolio 5. 7 12. 9 5. 4 – 36. 7 14. 0 L/T Govt. Bonds Large Stocks T-Bills 1. 4 8. 5 4. 9 4. 8 4. 7 – 37. 0 0. 1 T-Bills L/T Govt. Bonds Small Stocks Intl Stocks L/Term Govt. Bonds 1. 0 1. 2 3. 0 1. 2 – 43. 1 – 14. 9 << back to website – 5. 2
Smart Investment Behavior: Re-Balance § Some investments will grow faster than others § Rebalance is inherently contrarian § “Buy Low” and “Sell High” § Sell assets that have appreciated § Purchase assets that have underperformed § Returns portfolio to a comfortable level of risk << back to website
Importance of Rebalancing 1988– 2009 70% 60 • Stock allocation • Bond allocation 70% 69% 63% 50 50% 40 53% 47% 30 31% 30% 20 10 0 Year End 1989 1994 1999 << back to website 2004 2009
Feeling Panicky? 4 Reasons Not to Overreact 1. Market Timing is a losing strategy – Risk of selling low and buying high; you have to be right twice 2. Investors have been rewarded for taking risk – Risk isn’t always rewarded in the short term 3. Playing it “safe” can lead to a shortfall – Cash may be safe in the short term, but is risky in the long run 4. Emotional decisions often lead to regrets – Staying calm can help you avoid making moves you later regret << back to website
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