401(k): Your Hidden Income Opportunity, with Tom Palka

Tom Palka
AccountingWEB Workshop: December 7, 2000
Presenter: Tom Palka, Certified Financial Planner and the founder of RIA Technology, Inc.

Session Moderator: Thank you all for joining us! Today we are happy to welcome Tom Palka, a Certified Financial Planner and the founder of RIA Technology, Inc.

As a bit of background, Tom discovered the need for people to understand their employer savings programs in January of 1987 as he began the process of meeting individually with over 1,000 Ford Motor Company employees to review their company savings program. Since that time RIA Technology, Inc. has specialized in working with employees of companies like GM, Ford, Detroit Edison, and GTE. RIA also works with education and medical professionals. Tom has dedicated his career to helping people maximize their employer savings program options and making it the centerpiece of their entire financial picture.

Welcome, Tom - the floor is yours!

Tom Palka: Thanks.

The purpose of RIA Technology is to provide the turnkey back-office support system for Registered Investment Advisors. Our main benefit is our unique way of dispensing advice on your clients' employers’ 401(k) or 403(b) and get paid for it (You do not deal with the employer). We can also provide education and marketing plans for you to attract new clients. Our target audience is Income Tax Professionals, who have clients that have a job and are contributing to their employers’ 401(k) or 403(b) and would like professional help managing it.

401(k) Fundamentals

Because of the ability to invest pretax and the of the tax deferred growth of these investments it makes sense to maximize this savings vehicle for anyone accumulating retirement assets. Has anyone ever asked you about recommendations regarding their employer sponsored 401(k)?

Session Moderator: I've heard the question frequently.

Tom Palka: So have most professionals. Additionally, many companies match employee contributions. Most companies allow payroll deduction of 15% Pre-Tax ($10,500 Cap in 2000) and some plans allow 20% (GM). Most companies do not give matching contributions on lump sum deposits meaning that you must make contributions in every pay period.

Many plans allow loans. When you pay the money back you pay yourself the interest. Remember that the investments used for the loan are cashed in. I personally wouldn't want to borrow out of the plan at this time with the NASDAQ recently down around 40% from its high. Depending on the plan, loans are either paid back to the same investments that are currently in effect for payroll deduction or to the money market account and the employee must decide where to invest and take regular action to move the funds. Depending on the plan, loans are either paid back to the same investments that are currently in effect for payroll deduction or to the money market account and the employee must decide where to invest and take regular action to move the funds. Depending on the plan, loans are either paid back to the same investments that are currently in effect for payroll deduction or to the money market account and the employee must decide where to invest and take regular action to move the funds.

Session Moderator: What happens if you borrow money from your plan, then leave the company?

Tom Palka: First of all it depends on the plan. If the person is retiring, many plans will allow them to make monthly payments. Other plans require the loan to be paid in full within two years. Last of all it could be treated as a taxable distribution if it wasn't paid back. All the different choices available confuse most participants. Thus, it creates opportunity to service these individuals.

Lets talk about pulling money out of the program.

Distribution Rules

If there is one area of 401(k) knowledge that is well hidden from financial advisors is that a person can receive PENALTY FREE DISTRIBUTIONS FROM THEIR EMPLOYER SPONSORED 401(K) IF A PERSON RETIRES THE YEAR THEY TURN 55 OR OLDER. This is the most important strategy you will see today. This means an employee who turns 55 December 31 can retire January 1 the same year and pull funds from their 401(k) penalty free. Penalty free distributions do not apply to IRA rollover accounts.

If someone retires before the year they turn 55 they may want to consider Rule 72-T. Rule 72-T applies basically to any tax deferred investment vehicle including IRAs, 401(k), 403(b)s and annuities. Rule 72-T is receiving substantially equal payments out of the savings vehicle based upon life expectancy. Rule 72T also stipulates that once activated the distributions must continue for a period of no less than 5 years and also they must continue to age 59½ thus someone beginning at age 52 has 7 ½ years to age 59½ and someone taking money starting at age 57 must continue until age 62. If Rule 72-T is being utilized all IRAs must be aggregated for the calculation while 401(k)s and annuities are treated independently.

Are there any questions?

Next let's talk about benefits to the CPA

RIA Technology calculates rates of return for clients. We provide detailed account histories. Buys and sells, dates and cost basis, online account viewing, and qualified plan fees are paid with pretax dollars. The benefits to the client are all of the above plus professional advisement of their investments.

Now lets discuss the RIA Tech program.

RIA Technology provides Financial Professionals the potential ability to manage the 401(k) assets of their clients employers 401(k) (not all 401(k)s are eligible). Our advisory service will either take your investment recommendations based upon the funds available within the clients employers 401(k) or if you prefer you can use our actively managed model portfolios. We provide the framework for you to keep track of the investment choices available within your clients? 401(k). We implement the trades, post 1 mo, 3 mo, year-to-date and since inception returns to the web for you and your clients. We also manage IRAs and taxable accounts.

In our professionals only area of the website we post the trade histories and cost basis information of the investments thus helping in tax preparation. On a monthly basis we will earn a fee based on assets under management of which the largest portion is paid out to you. We transact business through Fidelity Investments and have available over 2,800 mutual funds without a sales charge. This covers approximately 90% of the funds available when you eliminate B shares, C shares. Our fee is debited from the clients account so there is never an accounts receivable. For those of you looking to expand your business we have some marketing ideas.

Does anyone have any questions?

RIA tech's model portfolios are based on a client's risk tolerance, we seek to have a core holding in the Dow, S&P 500, and the NASDAQ. Portfolios are periodically rebalanced to reduce risk or take advantage of market opportunities. The more conservative someone is, the more we hold cash or bonds. I find most people are afraid of running out of money when they retire.

Much of my job is to help people understand it's o.k. to spend some of the investment money when they retire. We take the headache, worry and stress out of investing and give the client all the thrills. As a CPA you are viewed by your clients as an expert in all financial areas. You can increase the services you provide to your clients, make money, and answer their needs.

We find that the proliferation of investment websites has helped to cause much grief and aggravation. We are here as the human browsers to make sense out of the vast array of choices available to people. Many people are not fully taking advantage of their employers sponsored savings program out of shear ignorance. It is our obligation as financial professionals to help people with the assets that make up the bulk of their estate. Financial professionals usually ignore 401(k) investments because there is no financial incentive to advise on the money. We make it possible to get paid for this service. Please call toll free 1-877-984-6300 or visit our website at www.riatech.com for more information. The personality of RIA Technology reflects innovation, excitement and a warm caring attitude towards all of our clients.

Are there any other areas you'd like covered?
I would like to thank you for your time today. And if you have any additional questions please feel free to contact me at the office: 1-877-984-6300. Or email me at: tpalka@riatech.com. Thank you and have a great day.

Session Moderator: Are there any other questions for Tom?

Jen South: No, thank you for all the information.

Tom Palka: My pleasure.

Session Moderator: Tom, can you make any recommendations to investors who are leaving a job and pulling their money out of a 401(k) and transferring it to an IRA?

Tom Palka: If the person needs to borrow the money they may want to roll it into the new 401(k) they are joining if the plan allows loans. If someone is looking for diversification and they retired after age 55 but before 59 1/2 you want to leave enough money in the 401(k) for expenses up until they turn 59 1/2. remember that distributions avoid the 10% penalty if the person retires the year they turn 55 or later on funds withdrawn from a 401(k) or 403(b). If they are under age 55 and do not need the money, I am a big fan of the fee based supermarkets that give the rep tremendous investment choices.

Session Moderator: Can you elaborate on this a bit?

Tom Palka: A plan that is sponsored by Fidelity will allow in kind transfers of IRA assets if the 401(k) assets are invested in Fidelity funds. Fee based fund supermarkets (we use Fidelity) allow the trading of securities between mutual fund families without having to wait for the funds to be transferred between custodians. This means that on one day you can sell a Putnam fund and buy an Oppenheimer fund all in the same day and not be out of the market. Fidelity does the record keeping and they waive the sales charges on most funds. Your client has the added benefit of having funds form several fund families listed on one statement. These fund families pay Fidelity a fee for the ability to be bought and sold through Fidelity. One of the big problems of investing in your favorite fund family directly is the time lag in retrieving the funds for withdrawal to a new mutual fund family. The supermarket format eliminates this problem.

Session Moderator: How big a fund selection does Fidelity offer - is it just Fidelity funds?

Tom Palka: In addition to the 200 or so Fidelity Funds offered they have approximately 2,600 funds available, practically anyone you can name outside of Vanguard.

Session Moderator: Thanks, Tom - is there any other information you want to include with the permanent transcript of your workshop?

Tom Palka: One last item on 401(k)s is in case a client is getting a divorce. A QDRO or a Qualified Domestic Relations Order can split the 401(k) assets between the former couple into two 401(k)s and thus avoiding income taxes.

Session Moderator: Do both parts of the 401(k) have to remain invested in a 401(k) plan to avoid the taxes, or can the non-participatory spouse cash out?

Tom Palka: Other than the last comment I think that is about all. Thanks again for the opportunity today! Anyone interested in receiving the Harry S. Dent newsletter should contact us for a complimentary e-mail monthly. www.riatech.com

Session Moderator: Thanks for coming today and for sharing valuable information!

Workshop sponsored by: Paychex

Paychex

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