If you have questions about investments, then you've come to the right place. Our experienced financial advisors have put together some information below that answer some of the more frequent questions that we receive. If your question isn't covered below, please contact us directly - we'd be happy to help.
- How Do Mutual Funds and Stocks Differ?
- Annuities and Retirement Planning
- Handling Market Volatility
- Retirement Plans for Small Businesses
How Do Mutual Funds and Stocks Differ?
Tom Saxon, LPL Financial Advisor
Whether you're a first-time stock investor or a seasoned veteran, you should understand what differentiates single stock investments from mutual fund investing.
Picture a collection of stocks, bonds, or other securities that are purchased by a group of investors and then managed by an investment company. That's a mutual fund. When you buy shares in a fund, you're really buying a piece of a large, diverse portfolio. Conversely, stocks are shares of a single company.
When it comes to managing their investments, some investors prefer leaving the details and skills to someone else. They like having a professional manager oversee the day-to-day decisions that a changing stock market involves and see that as a distinct advantage. A good manager, they might argue, has access to information that would cost them an exorbitant amount, even if they had the time and inclination to do the work themselves. On the other hand, some investors would never surrender control of their investments. Individual comfort level plays a big part in your investment choice.
Diversification is a big selling factor for mutual funds. When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. But that's not to say that an investor couldn't diversify his or her own stock selections. Diversification does not guarantee a profit or protect against investment loss; it is a method used to help manage investment risk.
In terms of liquidity, fund investors can cash in on any business day. When you sell a stock, you must wait three business days before the trade settles and your money is released.
The issue of red tape also sets mutual funds apart from stocks. Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings.
Transacting business with stocks can be a more complicated experience. Placing buy orders, selling shares, or dictating any number of orders can be time-consuming. To some, however, that's just part of the experience.
In summary, fund investors are often attracted by the overall convenience. By contrast, stock investors may tend to be more comfortable with their own investing skills. Keep in mind that the value of mutual funds and stocks will fluctuate with changes in market conditions; when investments are sold, the investor may receive back more or less than the original investment amount.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Annuities and Retirement Planning
Neil Zurowski, LPL Financial Advisor
Have you maxed out your contributions to your IRA and employer-sponsored plan? Do you want to save more? An annuity may be a good investment to look into.
Get the lay of the land
An annuity is a tax-deferred insurance contract. You invest your money with a life insurance company that sells annuities. In exchange for your investment, the life insurance company promises to make payments to you or your beneficiary in the future. Chances are, you'll start receiving payments after you retire. Annuities may be subject to certain charges and expenses so do your research first.
Understand your payout options
Understanding your payout options is very important. Payments are based on the claims-paying ability of the life insurance company. You want to be sure that the payments you receive will meet your retirement income needs. Here are some common payout options:
- You surrender the annuity and receive a lump-sum payment of all the money you accumulated. Your tax bill on the investment earnings will be due all in one year.
- You receive payments from the annuity over a number of years. If you die before this "period certain" is up, your beneficiary will receive the remaining payments.
- You receive payments from the annuity for your lifetime. You can't outlive the payments (no matter how long you live), but there will typically be no survivor payments after you die.
- You combine a lifetime annuity with a period certain annuity. This means that you receive payments for the longer of your lifetime or the time period chosen. Again, if you die before the period certain is up, your beneficiary will receive the remaining payments.
- You elect a joint and survivor annuity so that payments last for the combined life of you and another person. When one of you dies, the survivor receives payments for the rest of his or her life.
Consider the details
An annuity can often be a great addition to your retirement portfolio:
- Your investment earnings are tax deferred as long as they remain in the annuity. You don't pay income tax on those earnings until they are paid to you.
- If you die with an annuity, the annuity's death benefit will pass to your beneficiary without going through probate.
- Your annuity can be a reliable source of retirement income, and you have some freedom to decide how you'll receive that income.
- You're not subject to an annual contribution limit, unlike IRAs and employer-sponsored plans.
- You're not required to start taking distributions from an annuity at age 70½.
Choose the right type of annuity
Most annuities fit into a small handful of categories. Your choices basically revolve around two key questions. How soon would you like annuity payments to begin? How would you like your money invested? You should consult a Financial Professional to help you consider the investment objectives, risk, charges, and expenses carefully before investing.
Handling Market Volatility
Chris Parks, CFP®, LPL Financial Advisor
Conventional wisdom says that what goes up, must come down. But even if you view market volatility as a normal occurrence, it can be tough to handle when it's your money at stake.
Here are some tips to help handle market volatility.
Don't put all your eggs in one basket
Diversifying your investment portfolio is the best way you can handle market volatility. Because asset classes perform differently under different market conditions, spreading your assets across different investments such as stocks, bonds, and cash alternatives can help manage your overall risk. Ideally, a decline in one type of asset will be balanced by a gain in another, though diversification can't guarantee a profit or eliminate the possibility of market loss.
Focus on the forest, not the trees
As the markets go up and down, it's easy to become too focused on day-to-day returns. Instead, focus on your long-term investing goals. Only you can decide how much risk you can handle, but don't overestimate the effect of short-term price fluctuations on your portfolio.
Look before you leap
When the market goes down, you may be tempted to pull out altogether. The small returns that typically accompany low-risk investments may seem attractive when more risky investments are posting negative returns.
But before you leap into a different investment strategy, make sure you're doing it for the right reasons. How you choose to invest your money should be consistent with your goals and time horizon.
For instance, putting a larger percentage of your portfolio into conservative investments may be the right strategy for you if your investment goals are short-term. But if you still have years to invest, stocks have historically outperformed stable value investments over time.
Look for the silver lining
A down market does have a silver lining; the opportunity you have to buy shares of stock at lower prices.
One of the ways you can do this is by using dollar cost averaging. Here, you don't try to "time the market" by buying shares when the price is lowest. Instead, you invest the same amount of money at regular intervals. When the price is higher, you’ll buy fewer shares of stock, but when the price is lower, you will buy more shares. Over time a regular fixed dollar investment may result in an average price per share that's lower than the average market price.
Don't stick your head in the sand
While focusing too much on short-term gains or losses is unwise, so is ignoring your investments. You should check up on your portfolio at least once a year, more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to re-balance your portfolio to bring it back in line with your investment goals and risk tolerance, or redesign it so that it better suits your current needs. Don't hesitate to get expert help if you need it when deciding which investment options are right for you.
Retirement Plans for Small Businesses
Lora F. Davis, MBA, Vice President, LPL Financial Advisor
If you're self-employed or own a small business and you haven't established a retirement savings plan, what are you waiting for? A retirement plan can help you and your employees save for the future.
- Your contributions are deductible when made
- Your contributions aren't taxed to an employee until distributed from the plan
- Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free)
Types of Plans
Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or "qualified" [like 401(k)s, profit-sharing plans, and defined benefit plans]. Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement Income Security Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., "vest" in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.
Which Plan Is Right For You?
With a dizzying array of retirement plans to choose from, each with unique advantages and disadvantages, you'll need to clearly define your goals before attempting to choose a plan. For example, do you want:
- To maximize the amount you can save for your own retirement?
- A plan funded by employer or employee contributions? By employee contributions? Both?
- A plan that allows you and your employees to make pre-tax and/or Roth contributions?
- The flexibility to skip employer contributions in some years?
- A plan with lowest costs? Easiest administration?
The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.
A SEP allows you to set up an IRA (a "SEP-IRA") for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, although you don't have to make contributions every year, offering you some flexibility when business conditions vary. For 2022, your contributions for each employee are limited to the lesser of 25% of pay or $61,000 (up from $58,000 in 2021). Most employers, including those who are self-employed, can establish a SEP.
SEPs have low start-up and operating costs and can be established using an easy two-page form. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $650 or more.
SIMPLE IRA Plan
The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pre-tax contributions in 2022 of up to $14,000 ($17,000 if age 50 or older; up from $13,500 and $16,500, respectively, in 2021). You must either match your employees' contributions dollar for dollar — up to 3% of each employee's compensation — or make a fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to 1% in any two of five years.) Each employee who earned $5,000 or more in any two prior years, and who is expected to earn at least $5,000 in the current year, must be allowed to participate in the plan.
SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each employee. A financial institution can do much of the paperwork. Additionally, administrative costs are low.
Typically, only you, not your employees, contribute to a qualified profit-sharing plan. Your contributions are 401(k) plans are required to perform somewhat complicated testing each year to make sure benefits aren't disproportionately weighted toward higher paid employees. However, you don't have to perform discrimination testing if you adopt a "safe harbor" 401(k) plan. With a safe harbor 401(k) plan, you generally have to either match your employees' contributions (100% of employee deferrals up to 3% of compensation, and 50% of deferrals between 3% discretionary — there's usually no set amount you need and 5% of compensation), or make a fixed to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and "substantial and recurring," for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant that holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate (although you can require two years of service if your contributions are immediately vested). Contributions for any employee in 2022 can't exceed the lesser of $61,000 or 100% of the employee's compensation (up from $58,000 in 2021).
The 401(k) plan (technically, a qualified profit-sharing plan with a cash or deferred feature) is a popular retirement savings vehicle for small businesses. With a 401(k) plan, employees can make pre-tax and/or Roth contributions in 2022 of up to $20,500 of pay ($27,000 if age 50 or older; up from $19,500 and $26,000, respectively, in 2021). These deferrals go into a separate account for each employee and aren't taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan.
You can also make employer contributions to your 401(k) plan — either matching contributions or discretionary profit-sharing contributions. Combined employer and employee contributions for any employee in 2022 can't exceed the lesser of $61,000, up from $58,000 in 2021 (plus catch-up contributions of up to $6,500 if your employee is age 50 or older) or 100% of the employee's compensation. In general, each employee with a year of service is eligible to receive employer contributions, but you can require two years of service if your contributions are immediately vested.
Contribution of 3% of compensation for all eligible employees, regardless of whether they contribute to the plan. Your contributions must be fully vested.
Another way to avoid discrimination testing is by adopting a SIMPLE 401(k) plan. These plans are similar to SIMPLE IRAs, but can also allow loans and Roth contributions. Because they're still qualified plans (and therefore more complicated than SIMPLE IRAs), and allow less deferrals than traditional 401(k)s, SIMPLE 401(k)s haven't become popular.
Defined Benefit Plan
A defined benefit plan is a qualified retirement plan that guarantees your employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). As the name suggests, it's the retirement benefit that's defined, not the level of contributions to the plan. In 2022, a defined benefit plan can provide an annual benefit of up to $245,000 (or 100% of pay if less), up from $230,000 in 2021. The services of an actuary are generally needed to determine the annual contributions that you must make to the plan to fund the promised benefit. Your contributions may vary from year to year, depending on the performance of plan investments and other factors.
In general, defined benefit plans are too costly and too complex for most small businesses. However, because they can provide the largest benefit of any retirement plan, and therefore allow the largest deductible employer contribution, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.
As an employer, you have an important role to play in helping America's workers save. Now is the time to look into retirement plan programs for you and your employees.