Entrust New Direction Blog

Like most Americans, Juan did his best.  He worked 50 hours a week, took his kids fishing in the summer and sledding in the winter, occasionally fit in some golf games with his pals.  Every day, Juan tried to be the best dad, best husband, best friend he could be.  Juan also wanted to provide for himself and his family as well as possible, for now and the future.   So Juan contributed to his 401(k).  He figured as long as they matched 3%, he should figure a way to get that free retirement money, even if it meant a little less income right now.  

Then the stock market sunk and his 401(k) dropped 40%.

Then Juan was laid off.

Talk about a flying drop kick to the stomach. 

While surfing the web, ostensibly looking for a new job, Juan ran across a press release targeting the newly unemployed.   "What? I can invest the retirement money however I want?  No way!  I can't believe it!"  Since Juan was screaming in the empty basement, his wife ran downstairs to make sure the idleness of unemployment wasn't atrophying his brains.

When Juan explained about DIY retirement investing, and the discount, Juan's wife, Jenny immediately thought it was a scam.  "I don't think so.  Why haven't we ever heard about this?  The government is going to let regular people decide what to do with their retirement money?  There must be a catch." 

Still, Jenny had a small hope that this self-directed IRA investing was true, because she knew exactly where to invest some of the money - in her friend's new start-up kitchen gadget company.

Juan continued researching and discovered that there is an entire industry of self-directed IRA custodians and administrators, and one was located right in town!  Juan and Jenny happily transferred the funds from their 401(k) into a new self-directed Roth IRA.  Juan and Jenny took the buy direction letter home, and Jenny called her friend the kitchen gadget start-up company CEO.

Her friend the CEO was so excited, she knew Jenny loved the idea.  But then she  remembered the words of her start-up lawyer, "Accredited investors only." 

"Um, Jenny, are you an accredited investor" the CEO asked, knowing the answer.

Jenny's investment dream was smashed.

Jenny and Juan's IRA was not an accredited investor.

Juan and Jenny were able to find some other investments - they put some money in real estate, some in gold and some in CDs, but Jenny watched her friend's gadget company double, triple and quadruple in size.

Has this happened to you?  Maybe you know of a great investment opportunity but you don't have the requirements of an accredited investor.  Questions?  Watch this blog for more information on accreditation and discussions and what the little person can do.  

Kick photo courtesy of mighty mighty bigmac.

Bottles photo courtesy of shkumbin.

The small benefit to being unemployed, the green fields after the flood, so-to-speak, is that your retirement account can become a self-directed IRA, exploding your investment options wide open. This is also a small benefit to a job in which your employer does not offer a retirement plan - retirement plan freedom.

If you're fortunate enough to have a job right now, and that job offers a retirement plan, you may feel that you have little control over how you can invest your retirement money. You're probably right. You probably only have the option of investing in stocks through your employer's chosen fund(s). But, you may be saying to yourself, at least I can choose between aggressive and conservative stock market investing.

Maybe not.

The Wall Street Journal reports that the Pension Protection Act of 2006 allows employers to automaticaly enroll you in their 401(k) plan and automatically set you to the default investment option.

That's right. Not only can your employer decide that it's best for you to be in their 401(k) plan, but they can also decide how you should invest within your limited options.

Maybe you don't know anyone in your HR department. This should change. Try to discover which nice HR person has some control over your retirement plan and invite them to lunch.

Explain to them that there is a retirement plan option out there called a self-directed IRA, which allows freedom-loving Americans to invest however they choose, almost.

You can sell it to them as a way to differentiate themselves from competitors. New potential hires frequently ask in an interview, "Do you have a 401(k) plan?" Now, HR can answer, not only do we have a 401(k), we have a self-directed retirement plan, and you can choose to invest in real estate, gold, private stock OR public stocks and bonds and mutual funds."

You could tell them that allowing self-direction as a retirement option will improve morale, retain employees and help the general economy. These benfits may not be directly measurable, but they're real.

Many companies are no longer matching funds in their 401(k) plan. Even the organization formerly known as the American Association of Retired People, AARP, is no longer matching employee retirement contributions. Tell HR, if they're not matching, the least they can do is give employees freedom to invest.

If your HR person doesn't see the light, and especially if they're not matching your contributions, you can always open a self-directed IRA. If you want to stop contributing to your handcuffed 401(k), you can open a Traditional or Roth IRA. If you want to keep contributing to your 401(k), you could open a self-directed Roth as well.

With the Roth, your contribution is not tax-deductible, but the earnings are tax-free when you're ready to retire. And if you can wait until 2010 to open a Roth, you can derive many benefits.

Worse case, you got to know your HR person better. Best case, you're the hero of your company because you freed the jailed retirement plans.

photo courtesy of h.koppdelaney 

Employer healthcare costs are projected to jump 9% in 2010, and employees' costs will likely grow to double digits, according to a report from consulting company PricewaterhouseCoopers.

42% of the 500 employers surveyed reported that they would increase their employees' part of the cost burden.  41% indicated they would increase the cost share through plan re-design.

20% of employers expect to add a high-deductible health care plan as an option in the next two years.  PricewaterhouseCoopers reports that HDHPs are expected to lower health care utilization.   HDHPs also have the added benefit, when combined with a self-directed Health Savings Account, of becoming an investment vehicle.

Those employees who don't have an HDHP are expected to increase their usage of the health care plan, PricewaterhouseCoopers speculates, because many are worried about a potential layoff and want to utilize their health care before that may happen.  Unemployment is adding to the higher cost, as less people are members of commercial health care plans.

Wondering about your options as an employer?  Learn more about Health Savings accounts from the employer's perspective.

Not sure if an HSA is a good idea for you or your family?  Read one person's perspective on HSAs from the employee point of view.

The Atlantic Monthly's Jeffrey Goldberg wrote an article this month exploring his options as a small-time retirement investor, "Why I Fired My Broker". He fired his broker, it turns out, because his broker never called him back. Fine reason, if you ask me. But he has many more reasons why everyone should fire their broker.

1. Your broker likely doesn't want you as a client.

Goldberg asked Larry Gellman, a very successful financial advisor, who described a dire situation for anyone with under $10 million to invest. Gellman said, "People like you are in a sort of purgatory because no one would ever come out and tell you that he doesn't want your business anymore. You had to figure that out by yourself."

Goldberg also asked Robert Soros (George's son and deputy chairman of the Soros fund) about his unresponsive financial advisor. Soros reports, "They were never your advisers. Do not for a moment think that a brokerage firm is your friend."

Ouch. (If your broker actually is your friend, maybe you could take him or her out to lunch. Be gentle.)

2.Your broker probably doesn't think you can make your money back.

Goldberg translates a video by Merril Lynch's top investment strategist: "You’re not going to make money on your investments in the next 10 years, or 15, or 20, so you should stop worrying about your portfolio and go to the movies like everyone else."

Of course, not everyone feels this way, especially if they have money in the stock market, but no one can predict how many years you'll need to regain the lost ground. If you've seen 20,30 or 40% loss in a matter of one or two years, do you have the patience to wait for another 10, 15, 20 years?

3. Your broker won't allow you to buy real estate.

At a cocktail party, Goldberg asks another successful investor about advice for the little guy. Bill Ackman said, in part, "Buy a house. I think it’s a great time to buy a house.... It’s one of the best investments you could make."

As we all know, real estate is pretty cheap right now. Loans are hard to find, and more and more Americans have to rent. Your IRA can be the landlord and your IRA can sell the real estate when you decide to sell, not when your broker recommends selling.

4. You can't get a loan on stocks and bonds.

Your broker can't direct you to a bank which will lend your IRA money to double your buying power. Such banks do not exist. Banks in general have not exhibited good judgement lately, but a non-recourse loan is always a good decision for the bank and an excellent decision for your retirement.

5.Your broker earns a commission on what you buy.

Many brokerage firms have products they call self-directed, but the only choice you have is among their products. Not much of a choice, if you're not a stock broker.

6. Your broker likely earns a commission on your transactions, motivating him or her to promote transactions.

Yes, if you pay excellent attention to the market, know the companies and the "rules", and wish to gamble on the uncontrolled activity, of course you should buy and sell frequently. But I prefer blackjack.

It's not your broker's fault. If your broker does call you back, tell them about self-directed IRAs. We'd be glad to get them started in a new direction.

Yes, the unemployment rate is climbing. Of course everyone would rather be employed than un-. We all want money coming in. But for my tiny retirement fund, being laid off was the best thing that could have happened.

I recently went out for adult beverages with some co-workers from my old job at an international telecom company. The company had pretty good bennies overall, especially the matching 401(k) contribution. That was a benefit I only took advantage of after I was married (good thing she's smarter than I am), but free money is free money, so I'm glad I did.

Anyway, everyone had variations of the same story - "I lost 25%" or "I lost 35%" and even one guy's "I lost 45%". As some of you may know - this really hurts. Not only was it the company's match, but it was money from your sweat and tears, in the dump. Not likely to ever come back.

Luckily for me, when I left my job, I found a new job with a self-directed retirement company. One of the first things I did was move my old 401(k) into a self-directed IRA. It was really easy, and since I was out of the stock market, I didn't lose 25, 35 or 40%.

If you happen to be unemployed, laid off in the last 12 months, you can take advantage of a pretty sweet offer with Entrust New Direction (newdirectionira.com). We are waiving our normal setup fee, which means it's free to take your money from doing nothing (or worse than nothing), and roll it into a self-directed IRA so it's ready for any alternative investment that comes along. Or if you really want to stay in the stock market, you can do any combination of stocks/real estate/private company/loans.

Yes, getting laid off stinks. But at least you can let your retirement funds go free.