Special Reports

But It's Guaranteed (January 4, 2009)

It’s that time of the year again. We’ll soon hear from a member or two that were “sold” an annuity by their tax preparer, insurance agent, or another financial advisor. There have been plenty of articles published in the financial press warning investors of the pitfalls of annuity products. While high annual fees and steep surrender charges are chief among them, we will focus here on annuity “guarantees.”

Annuities are sold to investors on the prospect of guarantees. Most notable is the guarantee you will never experience a loss – a guaranteed return of at least your initial investment, no matter what happens in the stock market. For those investors that still have deep scars from the 2000 to 2002 bear market, this proposition looks pretty good. But what is this guarantee really worth?

Most all variable and Equity Indexed Annuities have a surrender charge period during which you are charged a fee to surrender your shares. These fees range from 5% to 20% in the first year with a fee schedule for surrender charges extending up to 10 years or more.

Just how many times has the stock market had a decline over a ten-year period in the last 75 years? The answer is none. With a portfolio diversified into bonds, cash, REITs, and other asset classes, the time horizon of a portfolio without a loss improves even further. So we ask, what is this guarantee, that an investor pays high annual fees for and essentially locks up the investment assets for many years, really worth? Consider too, that annuity products often have a very limited number of investment options.

If after all of this you still want to consider an annuity in the future, do your due diligence. Make sure you understand all of the fees and surrender charges associated with this product. As with any investment, consider if the annuity is really what is best for your portfolio or simply what may generate the best commission for the person selling it.

Why not just manage risk for free with diversification?


For more on annuities read, “The worst retirement investment you can make,” Liz Pulliam Weston, MSN Money

Should You Take A Pension Lump Sum Distribution? (September 29, 2006)

Those who have ever severed with an employer or those who may be about to, may have considered what to do with their 401(k) account. Many consider a rollover to an IRA to enhance investment flexibility. However, how many have ever considered this option for their pension?

Those accepting a buyout, retiring early on their own initiative, or simply leaving an employer for another opportunity, may be able to receive their vested pension benefits as a lump sum distribution. Some may prefer the security of a fixed income stream a pension typically provides. However, a lump sum payment could be advantageous.

By taking a lump sum distribution, you take control of your pension assets to manage as you see fit, while enjoying tax-deferred growth of an IRA. Because lump sum payments are calculated using the very conservative returns of the 30-Year Treasury Bond, exceeding this return over time could likely be accomplished with prudent money management.

If your pension plan is ever taken over by the Pension Benefit G uaranteeCorporation, a government agency that assumes the liability of underfunded pension plans, having taken a lump sum distribution may look even more attractive. If the PBGC takes over your plan, the monthly payments you may be expecting for the rest of your life could be significantly reduced. A lump sum payout prior to this event protects you from this risk.

Another consideration is the implementation of the Pension Protection Act in 2008. At that time, a new formula for how lump sum payments are calculated will be phased in that will essentially yield a lower lump sum payment than you would get under the current formula. Therefore, if you are considering taking a lump sum distribution from your pension, take it before January 1, 2008.

Considering a Rollover IRA? (April 12, 2006)

Are you planning to retire or leave your job soon? If so, you will need to decide what to do regarding the money you’ve saved in your 401(k) plan. If you’re like many investors, your 401(k) account may represent your largest investment account. Thus, what you do with these assets could very well be the most important decision you will ever make concerning your future financial security.

Many people, when changing jobs or retiring, often choose to transfer 401(k) assets to a Rollover IRA (an account set up to receive 401(k) assets) because it offers the opportunity for continued tax-deferred growth while, in most cases, significantly increasing investment flexibility. Although the FIA Publishing, LLC cannot offer personal investment advice, we can offer a few points to consider concerning a Rollover IRA.

The Rollover IRA option is available to anyone when retiring or otherwise leaving a company. Additionally, employees who reach age 59½ and are still working can transfer existing 401(k) assets to a Rollover IRA and continue contributing to their 401(k) plan. Salaried employees at General Motors, Delphi, Ford, and Visteon have at least a portion of their 401(k) assets eligible for a Rollover IRA at anytime during their working career.

We believe the primary benefit of transferring assets from your 401(k) to an IRA is increased investment flexibility. The GM, Delphi, Ford, and Visteon 401(k) plans are among the best 401(k) plans in the country, but three to six dozen investment options just don’t compare to the thousands of mutual funds and other securities available through an IRA. Increased investment flexibility not only enables you to potentially achieve higher returns, but can also offer more ways to manage risk in your portfolio. In today’s investment landscape there are numerous no-load, no-transaction fee funds that allow you to trade with no additional costs, just as you do now in your 401(k) plan.

There is a benefit from an estate planning standpoint as well. The options available to a non-spouse beneficiary (like a child) are generally more flexible in a Rollover IRA than a 401(k). A non-spouse beneficiary of a 401(k) is generally required to take all distributions and pay all associated taxes within five years or less. In fact, non-spouse beneficiaries of a GM, Delphi, Ford, or Visteon 401(k) account must take a full (taxable) distribution within 60 days. In a Rollover IRA, however, the beneficiary may have the flexibility to stretch out the life of an IRA over his or her life expectancy and enjoy years of tax-deferred growth of the assets.

One downside to the IRA is you won’t have a loan provision. But your 401(k) is the worst place to go for a loan. (Visit "A Hard Look at 401(k) Loans" for more details on this). Another consideration is your retirement age. If you retire between age 55 and 59½ you can withdraw assets from a 401(k) penalty free before age 59½ with no restrictions. Assets can be withdrawn from an IRA penalty free before age 59½, but with the restrictions of IRS Rule 72(t).

When considering a Rollover IRA, be very careful about where you transfer your 401(k) assets. Remember that your main goal is increased investment flexibility. So, whether your IRA will be self-directed or managed by an advisor, you don’t want to be limited to only one family of mutual funds or a broker’s select list of investments. Most importantly, never roll over 401(k) assets into an annuity. Annuities are products with high fees, surrender charges, low flexibility, and horrendous tax treatment, but are popular with some advisors because of the high commissions they get paid to sell them. An annuity is very rarely the best investment choice in any situation and simply does not make sense for assets that are already growing tax-deferred. (See “The worst retirement investment you can make.”)$

Are you considering a Rollover IRA for all or a portion of your 401(k) assets? If so, consider the professional investment management services of Mainstay Capital Management. Mainstay utilizes an investment network with thousands of no-load mutual funds and other investment options for the management of IRAs. Call Mainstay Capital Management toll-free at 1-866-444-6246 for more information or visit www.mainstaycapital.com.

Are GMAC Demand Notes Safe? (January 3, 2006)

With all the talk of a GM bankruptcy, many investors have been asking the question – What’s the risk in holding GMAC Demand Notes?

For years many have utilized GMAC Demand Notes as an account for cash reserves that pays a much higher rate of interest (5.5% as of 12/30/05) than a typical money market account. The rules are about the same in terms of check writing and other features.

With speculation of a GM bankruptcy running wild on Wall Street and Main Street over the past few months, some have begun to wonder about the risk of GMAC Demand Notes. Unlike accounts at a local bank, GMAC Demand Notes are not FDIC insured. In addition, Demand Notes are regarded as unsecured debt by GMAC, meaning that no specific assets have been pledged to pay off these obligations. So, theoretically an investor’s money is at risk. Brokers and others who are employing fear tactics to accumulate more assets in their proprietary products have done a very good job of preying on investors’ concern over GMAC Demand Notes and a GM bankruptcy to their benefit.

In our opinion, the actual risk of losing money in GMAC Demand Notes is very, very remote. First, GM must actually file bankruptcy for the scenario that some lay out to even occur. While GM may seek bankruptcy-court protection at some point in the distant future to reduce pension and healthcare burdens, we simply don’t believe it will happen anytime soon. Second, the assumption is that if GM were to file bankruptcy, they will immediately start dipping into GMAC Demand Note accounts to pay off creditors. The reality is that although GMAC Demand Notes are unsecured debt, there is ample cash and other assets available to mitigate any perceived risks. Additionally, the GMAC division boasts growing profits and a healthy, stable financial structure that would typically result in an investment grade status for its debt if it were a stand alone entity. However, issues with the parent company have tarnished GMAC’s credit rating. This reality is not lost on GM management, which has publicly acknowledged that it may sell all or part of GMAC. Were GMAC to be sold, any risk in owning Demand Notes would be diminished even further.

For those who are still concerned, however, there is an alternative. GMAC Bank offers a Money Market Savings Account with a yield (4.2% as of 12/30/05) that is lower than Demand Notes, but more generous than typical money market accounts. The GMAC Bank money market savings account is FDIC insured up to $100,000 per depositor (just like other banks).

What about Ford Interest Advantage Floating Rate Demand Notes? This type of account, offered by Ford Motor Credit Company, has a similar structure to that of GMAC Demand Notes. Again, these Notes are not FDIC insured. They are unsecured obligations of Ford Motor Credit. Ford Interest Advantage Floating Rate Demand Notes currently yield about 5%.

For the record, our goal is not to be a spokesperson for GMAC or Ford Motor Credit. We just want to offer a more practical and realistic view of Demand Notes. For more information on GMAC Demand Notes or GMAC Bank, visit www.gmacbank.com. For more information on Ford Interest Advantage Floating Rate Demand Notes, visit www.fordcredit.com.

In the meantime, if a broker or other financial services representative tries to scare you out of your Demand Notes, consider whether he is really doing it in your best interest or his. $

Are you wondering how GMAC Demand Notes or Ford Interest Advantage Floating Rate Demand Notes should fit into your investment portfolio or cash management plan? Mainstay Capital Management, a fee-only, independent advisor can help you optimize your investment and cash management strategy. Call Mainstay Capital Management toll-free at 1-866-444-6246 for more information or visit www.mainstaycapital.com.


Please note: The FIA Publishing, LLC is not affiliated with nor receives compensation from GMAC or Ford Motor Credit.

Special Reports

Not All Bonds Are Created Equal (March 30, 2012)

Hope and Fear Head Fake (December 1, 2011)

Bad Macro, Good Micro (September 1, 2011)

Fidelity Low-Priced Stock Get's A New Manager (August 15, 2011)

The Impact of the Sovereign Debt Crisis (June 30, 2011)

The End of QE2 (May 27, 2011)

New Options Available in the GM Roth 401(k) Account (November 09, 2010)

GM Salaried Life Insurance Transition (February 01, 2010)

Are GMAC Demand Notes Now Safe? (January 22, 2010)

The Risk in Morningstar Ratings (October 27, 2009)

Health Savings Accounts (October 1, 2009)

"All that Glitters" (March 26, 2009)

Funding Your Healthcare After Age 65 (March 20, 2009)

Health Savings Accounts (March 19, 2009)

2009 Required Minimum Distribution Rules (February 13, 2009)

Lessons from the Madoff Scandal (February 10, 2009)

Interest Income Fund Update Change in Credit Rate Process (December 31, 2008)

The Value in High Yield Bonds (December 31, 2008)

Update: GMAC Demand Notes - The New Risks (December 11, 2008)

The Safety of Your Pension (November 20, 2008)

401(k) Debit Cards (September 17, 2008)

GMAC Demand Notes - The New Risks (July 30, 2008)

Severance Package Risks (April 1, 2008)

TIPS (March 20, 2008)

Retirement Income Strategies (January 10, 2008)

Create A Pension Backup Plan (September 25, 2007)

The Party is Over For Real Estate (June 20, 2007)

GMAC Employee 401(k) Plan Decision (November 6, 2006)

Should You Take A Pension Lump Sum Distribution (September 29, 2006)

Considering A Rollover IRA? (April 12, 2006)

GMAC Demand Notes - What's the Risk (January 3, 2006)

Considering Early Retirement (Revised December 23, 2005)

Delphi PSP Participants - GM Stock Dividend Disposition (September 15, 2005)

Oil's Well (June 30, 2005)

Presidents and Stocks (September 24, 2004)

Buy the Manager, Not the Fund (July 1, 2004)

Breakpoint Discounts - Are You Owed a Refund? (January 20, 2004)

Changes to SSPP and PSP - GMH Stock Fund (December 5, 2003)

Delphi SARs Offer - Keep Your Options Open (November 21, 2003)

The Mutual Fund Mess (November 13, 2003)

False Sense of Securities (March 15, 2003)

A Hard Look at 401(k) Loans (February 12, 2003)

Investing in Junk Bonds (December 30, 2002)

The Case for Emerging Markets (February 15, 2002)