The following article originally appeared in an issue of The Daily Plan-It, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

Advisors know there’s a host of unknown costs and fees lurking inside a client’s 401(k) plans, IRAs and other retirement accounts. Often, those fees make a world of difference in investment returns. But most clients don’t know the fees that they pay to plan providers. A recent AARP study found that more than seven in ten 401(k) plan participants incorrectly reported that they did not pay any fees, and 6 percent said that they didn’t know whether or not they pay fees. Clients often fail to read the fine-print disclosures that explain fees. A recent Smart Money article [http://tinyurl.com/3nvxpsj] detailed the fees. I’ve included the highlights for you.

What You Don’t Know Can Hurt You

Beginning Jan. 1, plan sponsors must disclose fees to participants. But there are other lesser-known fees to consider. Clients who move IRA accounts to new brokerage firms can be hit with two unexpected fees: the account transfer fee and the annual maintenance fee. In addition, retirement accounts that use managed-money programs will have termination fees that must be paid prior to money being moved from a current manager to a new manager. These can include that quarter’s asset fee, management fee and custodian fee.

10 Fees Eating Up Retirement Savings:

1. Account termination fees.

2. Account maintenance fees.

3. Various account transfer fees.

4. Roth conversion fee: This is charged when a traditional IRA is converted to a Roth IRA.

5. Federal fund wire fee and overnight delivery fee.

6. “Special investment” fee: This applies to nontraditional/ non-publicly traded investments such as private placements, real estate and certain limited partnerships.

7. “Special investment” set-up fee: This also applies to non-traditional investments not publicly traded. Such fees are usually one-time only.

8. Form 990-T filing fee: For accounts holding nontraditional/ non-publicly traded investments, the custodian may need to file IRS Form 990-T to report unrelated business income.

9. Loan processing fees: Clients who take loans from retirement funds may face a processing fee.

10. Recordkeeping fee: Small business owners with solo-K/individual-K plans may be charged a recordkeeping and filing fee of several hundred dollars, if they use the services of a record keeper.

As advisors, we can’t make these fees go away, but there may be a tax-efficient way to pay them. For instance, if a client is in the “accumulation” phase of saving for retirement, it would make sense to pay any allowable fees with what’s called non-qualified money, that is, money that’s outside of the retirement accounts. This would allow more money in the account to grow tax-deferred.

By contrast, if a client is in the distribution phase of retirement, it may make sense to have these fees paid from the qualified account.

As always, I hope this article has helped you and your clients. Please contact our office if you need any assistance.

I recently posted about the importance of regularly reviewing and updating beneficiary designations for all of your financial accounts, retirement accounts, pensions and life insurance policies.  The recent United States Supreme Court case, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 497 F.3d 426 (2009),  highlights how critical it is to keep your beneficiary designations up to date.

William Kennedy participated in his employer’s pension plan.  In 1971 William married Liv and in 1974, William updated his beneficiary designation to name Liv as beneficiary of his pension.  William did not name a contingent beneficiary.  In 1994 the couple divorced.  Under the terms of the divorce decree, Liv waived all rights to the pension.  After the divorce, William updated beneficiary designations on other assets to name his daughter as beneficiary, but he neglected to update the beneficiary designation on his pension.

Upon his death, Williams daughter, Kari was appointed as executor of his estate.  Kari requested that the administrator of the pension deliver the funds to her, but the pension administrator refused and instead issued the funds to Liv in accordance with the beneficiary designation.  The Supreme Court upheld the pension adminsitrator’s actions despite the waiver of rights contained in the divorce decree.  The Court did indicate that a Qualified Domestic Relations Order (QDRO) would have been effective in eliminating the spouse’s rights.  Nonetheless, this decision indicates the weight of importance placed on beneficiary designations and highlights the need to keep designations up to date as part of your comprehensive estate plan.

The following story comes from one of my colleagues:

After weathering a difficult divorce, Bob met Mary, the love of his life.  After a year of courtship, Bob and Mary were married.  The couple built a great life together.  Bob was in upper management at a major local company, and Mary was a homemaker who relied on her husband for support.  In their free time, the couple traveled the world together and lived life to the fullest.  Sadly, Bob unexpectedly died of a heart attack.

After the funeral, Mary sought the assistance of an attorney to help with the administration of Bob’s estate.  The attorney sorted through all of Bob’s files and records and discovered that 15 years prior, Bob had taken out a $1 million life insurance policy.  Unfortunately, after his marriage to Mary, Bob had never updated the beneficiary designation and it still named his ex-wife as the recipient of the $1 million life insurance proceeds.

Mary was devastated. She and Bob had been married for over ten years. To make matters worse, Bob’s will was drafted such that all estate taxes were to be paid out of the residuary estate. Mary was the recipient of the residuary estate.  As a result, not only did Mary not receive the proceeds of the life insurance policy, but she had to pay estate taxes on the $1 million life insurance proceeds that were paid to the ex-wife!

It is important to recognize that a will does not dictate how all of your assets will pass upon your death.  Many assets, such as certain bank accounts, IRAs, 401(k)s, retirement accounts, life insurance polcies, etc., use beneficiary designations to indicate who will receive the asset upon your death.  As part of a comprehensive estate plan, it is critical that all of your beneficiary designations are reviewed with your estate planning attorney to ensure that they will operate properly in conjunction with your estate planning documents to achieve your intended result.  In addition, it is crucial that your beneficiary designations be reviewed and updated on a regular basis, preferably at least once per year.

The North Carolina Bar Association’s Young Lawyer Division has a terrific Senior Citizens Handbook that serves as a resource for senior citizens and their families.  While the handbook emphasizes North Carolina law and programs and is written for senior citizens, it also contains general information that would be helpful to caregivers, younger persons or persons living out of state.

Topics covered include:

Money Matters

• Social Security and Supplemental Security Income
• Food Stamps
• Bank Accounts
• Income Taxes
• Individual Retirement Accounts
• North Carolina Property Taxes on Residences
• Private Retirement Plans

Health Care

• Medicare
• Medicaid
• Nursing Homes
• Drugs
• Patients’ Rights
• Confidentiality
• Advance Directives
• Health and Life Insurance

Rights and Protections

• The Con Game
• Identity Theft
• Unwanted Solicitation: Phone Calls and Junk Mail
• Age Discrimination in Employment
• Voting Rights
• Housing
• Protection Against Crime
• Abuse and Neglect

Planning for the Future

• Generally
• Owning Property
• Wills and Disposition of Property
• Probate and Estate
• Power of Attorney
• Health Care Powers of Attorney and Living Wills
• Living Trusts
• Guardianship
• Gift, Estate and Inheritance Taxes
• Veteran’s Affairs
• Where to Call For Help

Legal Services

• Reference and Referral Information

Glossary of Common Terms

The publication is updated periodically.  The most recent version was updated in mid-2005.  As such, some of the benefit eligibility limits, dollar amounts and tax rates may have changed since publication, but the handbook still serves as a great information source to aid in understanding the different topics.

To download a copy of the handbook Click Here.

This week the Consumer Reports Money & Shopping Blog ran a great two-part series on useful retirement planning websites.  If you are looking for advice and information regarding retirement planning, here are some great sources:

1. Social Security Administration
   
2. Internal Revenue Service
3. Pension Benefit Guaranty Corporation
4. Medicare Rights Center
5. Elderhostel
6. TreasuryDirect
7. National Association of Personal Finance Advisors
8. Retirement Living Information Center
9. International Living

In addition to the above, I would add the following sites:

1. U.S Financial Literacy and Education Commission – A compilation of government-provided retirement planning resources.
2. Employee Benefits Security Administration – Consumer information on retirement plans.
3. AARP Financial Planning and Retirement
4. Yahoo! Finance – Retirement
5. MSN Money Retirement and Wills

To see the Consumer Reports articles in full:

5 Best Websites for Retirement Planning

5 (more) Websites for Retirement Planning