Life cycle funds simplify retirement investment choices

By Bob Moeller
WEAC Member Benefits

December 2006

Financial Planning Seminars
Achieving Financial Independence

I have constantly been encouraging you to take charge of your finances yourself. It may seem confusing sometimes, but many changes have occurred to make your financial life easier. An example is your retirement investments (TSAs). It used to be you had to use insurance companies and you had limited investment choices. Over time you got many more investment choices (called sub-accounts, but similar to mutual funds). Then mutual funds themselves were approved to sell TSA products (so if you used only no-load mutual funds – which you should – you paid much lower fees). The WEA TSA Trust then started using only no-load funds. But still, it was complicated picking out which funds to invest in and deciding how much you should have in the stock market.

Many years ago, John Bogle, chief of the Vanguard Mutual Funds, truly revolutionized stock market investing by inventing the S&P Index Fund. It buys only the 500 largest companies and in pure mathematical ratio of their weight in the overall stock market. They laughed at his idea, but his invention out-performed the average managed mutual fund which had high management costs. Because of his success, there are now hundreds of index funds ranging from large company funds to small company to international to bond index funds.

But still, how much in the stock market and which funds should you pick? So the “lifestyle” fund was invented, i.e., tell us what kind of investor you are (conservative, etc.) and we will choose your index funds for you. Shortly after that came a refinement made to order for your TSAs – life cycle funds. “Tell us when you want to retire, and we will pick index funds for you, gradually changing the overall mix to be more conservative as you get closer to retirement." Many of the no-load fund families do not charge any extra fees for this.

So, Vanguard, as an example, has funds designed for retirement anywhere between now and 2045. The further you go out in time, the more stock index funds and less bond index funds you will own. Total Vanguard cost for these funds is about 0.2%. That’s 0.2%. So, if you have $100,000 in one of these target retirement funds, your total Vanguard cost is $200 per year. That’s cheap. Please see the sidebar showing you an easy way to check out the actual index funds used, their performance, etc.

The WEA TSA Trust has announced it will be offering the Vanguard Target Retirement Funds on January 1, 2007. For those of you who don’t like to get too involved in making investment decisions but realize some of your investments should be in the stock market, this is a great way to participate. Those of you who now have most or all of your money in the fixed (which will be paying a good safe 5% as of January 1, 2007) can experiment by putting some of your money in the target retirement fund of your choice. And if you’re still a little afraid to be in the stock market, leave some money in the fixed. This is a good change for WEAC members.

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Check out index funds

You can check out all Vanguard funds on the Internet:

• Go to www.vanguard.com
• Click on: Go to site
• At top click on: Research Funds & Stocks
• Next click on: Fund list by name

Then scroll down to click on any fund you wish to check out. For example, click on the Target Retirement 2035 Fund. You will see several tabs at the top. Click on “holdings” and see exactly which index funds are in the 2035 fund and in what proportion.You can use this same procedure to check out any of the individual index funds.

Note that if you go to the “fees” section, it says you pay $15 per year per fund fee. You will not pay these fees if you invest through the WEA TSA. Your total cost from Vanguard will be 0.20% or 0.21% depending on the fund selected.

For more information about the Vanguard Target Retirement Funds available January 1, 2007, to WEA TSA Trust participants, go to weatrust.com/lifecycle.

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And now a warning: Beware of ‘pension enhancements’

Because of comments I made at one of my seminars last spring, a sales firm hired two separate law firms to threaten suit. I have never spoken to a salesperson from this firm to my knowledge. My warnings arose because of concerns raised by members regarding their contacts with this firm. It appeared that members were getting recommendations to not take a joint survivor pension option (which of course protects the spouse in the event of the retirees’ death), but rather take the “life only” option.

Normally, of course, these suggestions mean the sales outfit wants to sell something to replace the joint survivor option. I have never seen a pension enhancement or maximization product that would actually benefit members with any degree of certainty. In fact, WEAC long ago retained an expert in retirement planning to review and report to us on such concepts. A copy of that review is available to any member who wishes one. The review found such concepts were not a good idea. Nevertheless, I responded to the threat of suit by simply requesting that the company inform me of what they were selling. I even copied the Wisconsin Insurance Commissioner with my letter, hoping that would encourage the sales outfit to respond. Certainly if they have generated some alternative that would benefit members I would let you know. They have absolutely refused to supply me with any information. The company has no relationship at all with the Wisconsin Education Association Council. I have checked, and the company has no relationship with the Wisconsin Retirement System. Its name apparently simply has coincidental similarities, it being the Wisconsin Retirement Council. If you get a proposal from them, I would appreciate it if you would inform me just what is being proposed. I will be happy to evaluate it for you.

Thank you and be careful.

Posted November 29, 2006