News from National Penn Wealth Management Group
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 In this issue:
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| “Safe” Treasuries Face Increasing Interest Rate Risk (back to top)
For fixed income investors, the impact that fiscal and monetary stimuli may have on U.S. Treasury debt in the coming years is cause for concern.
The U.S. government, U.S. Treasury and U.S. Federal Reserve have initiated many funding facilities and programs in an effort to stabilize both the lending markets and the U.S. economy. Record U.S. debt issuance to fund these initiatives will put upward pressure on interest rates as investors attempt to absorb the additional supply.
U.S. Treasuries provided strong returns in 2008 as investors sought safety and liquidity, driving interest rates across the U.S. Treasury yield curve to historic lows. As fiscal and monetary stimulus measures are effective in stemming the slide of economic conditions, investor confidence will pick up and risk aversion will subside. Demand for U.S. Treasuries will weaken as investors reposition their portfolios seeking higher yielding securities.
Hampered by weak consumer and business spending, high unemployment, and a housing market that is still in the corrective phase, the U.S. economy has yet to stabilize. Consistent with past recessions, the U.S. economy will rebound and prosperity will return. Although inflation is expected and welcomed during economic recoveries, higher than expected inflation is likely due to the historic levels of monetary and fiscal stimuli used to reignite our economy. Higher inflation erodes the value of fixed income investments and leads to higher U.S. Treasury yields in order to compensate investors for a decline in purchasing power.
Given this confluence of inflationary factors, investors will be wise to avoid long-term Treasury bonds and favor short-duration issues and Treasury Inflation-Protected Securities (TIPS). Corporate bonds continue to offer value despite the fact that year-to-date 2009 performance is already nearing double digits. Firm selection will be very important as company fundamentals will ultimately drive future performance.
James D. King, president and chief investment officer National Penn Investors Trust Company National Penn Investors Trust Company provides investment management and trust services to individual, corporate and institutional clients. _____________________________________________________
Why 401(k) Investments Should Be Monitored Frequently
It is common for 401k plan sponsors to conduct an annual review of their investments ─ the frequency traditionally recommended by advisors ─ but both the plan and its participants may achieve greater benefit from quarterly reviews.
We understand that quarterly reviews may sound unreasonable for many small businesses whose management is already hard pressed for time. However, companies that begin to monitor their plan’s investment options more regularly quickly perceive why this can be advantageous.
For starters, frequent monitoring helps alert plan sponsors to potential problems more quickly and to react in a timely manner. For example, assume that a quarterly review reveals that for the past two quarters a particular fund in the plan has dramatically underperformed its peers. This can enable the plan sponsor to begin to investigate immediately, rather than to find six months later that the fund has lagged its peer group for an entire year.
In our example, the fund’s disappointing performance may be due to a spell of bad luck that will ultimately be overcome. However, it also is possible that other less favorable factors may be at work, such as:
There also are many other possibilities – but whatever the problem may be, it is the responsibility of the plan sponsor and the plan’s advisor to address the issue on as timely a basis as possible.
An additional reason to review plan investment options every quarter is that 401(k) participants have become much more active in asking questions about their portfolios. That’s hardly surprising, given the recent dislocation in the markets and the rise in participant concerns. Quarterly investment reviews place the sponsor and its advisor in a far more informed position to answer participant questions.
Frequent monitoring of portfolios also improves the ability of the plan’s advisor to help participants adjust asset allocation models and assess which options might serve them best.
E. Vaughn Landes, president National Penn Capital Advisors National Penn Capital Advisors is a registered investment advisor that consults to 401(k) and other defined contribution plans and addresses the personal wealth needs of business owners and their key employees.
Securities provided by National Penn Capital Advisors are offered exclusively through NRP Financial, Inc. Member FINRA/SIPC _____________________________________________________
Excessive Withdrawal Rates Can Hamstring Retirees
Bear markets can do considerable damage to a retiree’s investment portfolio. However, retirees also face considerable peril if they withdraw too much money from their portfolio over time.
Excessive withdrawals are a stealth threat to financial security: By the time retirees realize that they have depleted too much of their retirement savings, the damage often is past repair.
Many retirees mistakenly assume that their withdrawal rate can be the same as the interest rates from a CD or a bond fund – but those rates often are higher than the 4 percent annual withdrawal rate that many financial advisors recommend.
In 1994, a research paper published by William Bengen revealed that retirees who draw down 5 percent a year run a 30 percent chance that their nest egg will “run out of steam before they do.” Conversely, retirees who draw down no more than 4.2 percent of their portfolio each year are likely to have a sufficient income stream for their entire retirement. A more recent study confirms this. It found that 4.4 percent is the lowest initial withdrawal rate that survived any rolling 30 year period since 1871.
Retirees often do not consider the relationship between their withdrawal rate and inflation. Twenty years from now, at an average inflation rate, a retiree may require $180,000 to equal the purchasing power of $100,000 today. An optimal retirement portfolio will continue to grow so that the size of annual withdrawals also can grow, even as the withdrawal rate remains the same.
Historically, a portfolio that balances equities and fixed income and has a withdrawal rate in the neighborhood of 4% will enable a retiree to maintain purchasing power. Higher withdrawal rates make this difficult to achieve, especially in periods where inflation is above average or when a portfolio declines in value due to a bear market.
Robert R. Thomas, CFA, CFP®, president & CEO Vantage Investment Advisors, LLC. Vantage Investment Advisors, LLC. is a registered investment advisor that provides investment management services to individuals, trusts and qualified plans. _____________________________________________________
Many 401(k) plan participants were deeply disappointed by the 2008 performance of certain target-date funds. Among 31 funds with a 2010 target-date for retirement, the average loss approached 25 percent. For those investors who plan to retire in the next several years, the damage to their 401(k) nest egg may be long lasting.
The investment performance of the worst performing funds was generally exacerbated by aggressive allocations to riskier assets, such as equities and REITs. In years when these assets performed well, 2010 target-date funds with significant equity/REIT exposure generated higher returns than more conservative 2010 funds. However, the conservative funds subsequently proved to be less vulnerable to the 2008 market downturn.
Many plan sponsors mistakenly assume that funds with the same target-date tend to have similar glide paths, i.e., the progression of a fund’s asset allocation from a more to less risky investment profile over time. In actuality, there can be great dispersion in regard to how target-date funds are managed. For example, some target-date funds emphasize wealth preservation as the investors’ retirement date approaches, to protect against heavy losses in the event of a market downturn. That is especially important if soon-to-retire participants plan to transition their plan assets to an annuity or other income producing vehicle. Other funds may seek to manage the fund to a date well past an investor’s retirement. To help investors remain ahead of inflation during a conceivably long retirement, these funds generally maintain a riskier profile. Both approaches may be reasonable, but both may not be suitable for all participants. Sponsors should decide which philosophy is most appropriate for their employee population.
401(k) participants should not automatically invest in a target-date fund simply because it is one of the options offered by the retirement plan. It is essential for every participant to evaluate the risk and return parameters of their fund.
One of the first questions is whether a target-date fund’s glide path is appropriate. The answer depends to a great extent on the number of years prior to a participant’s expected retirement. A relatively high allocation to historically volatile assets may be fine for an investor whose retirement is a decade or more away. However, if the glide path allows for an aggressive allocation close to the target-date, caution may be advised.
Most 401(k) participants do not have the background or access to data that can enable them to easily make this determination. However, the plan administrator or advisor to the plan should be able to provide perspective on the degree of risk assumed by a target-date fund at any given point in its glide path progression.
Trisha Brambley, president RESOURCES for Retirement RESOURCES for Retirement provides investment fiduciary services and plan consulting to retirement plan sponsors.
Securities provided by RESOURCES for Retirement are offered exclusively through NRP Financial, Inc. Member FINRA/SIPC _____________________________________________________
Dynasty Trusts Attract the Interest of Farsighted Families
Delaware is among a number of states that offer dynasty trusts, which are becoming an increasingly popular tool for wealthy families.
For families that seek to create a multi generational legacy, dynasty trusts can remain in force either in perpetuity or for many years. Like many other trusts, these vehicles enable their creators to:
Personal reasons vary when it comes to establishing dynasty trusts. Sometimes the creators of these vehicles simply seek to protect their assets to the greatest extent possible, so that the fortune remains within the family and can be enjoyed and used productively by multiple generations. Other families of great wealth may be concerned that not every present or future member will handle his or her finances in a prudent manner, or that a family member – perhaps yet unborn – will be impaired by a serious disability.
As noted above, a highly compelling reason to enter into this type of trust is the ability to mitigate family federal transfer taxes across multiple generations. Dynasty trusts leverage the exemption amount that can be placed in trust (currently $3,500,000), as this sum will not be subject to transfer taxes again until trust assets are fully distributed. Creators of Delaware dynasty trusts can choose when the trust terminates as far down the lineal chain as they wish.
Due to their longevity, it is important to build sufficient flexibility into the terms of a dynasty trust. Delaware’s tax laws, for example, permit trustees to divide duties among several entities or individuals, each of which is considered to be a fiduciary and subject to traditional fiduciary standards and obligations. When a number of advisors, family members and corporate trustees are involved, rather than a single trustee or advisor, the risk is reduced that the trust will be administered in a manner that departs from the trust creator’s original wishes.
Thomas A. Campbell, EVP and chief trust officer Christiana Bank & Trust Christiana Bank & Trust Company provides banking, fiduciary, agency and investment services that allow clients to take advantage of Delaware’s robust, clear and predictable business and trust law. _____________________________________________________
It has become increasingly apparent that a large number of baby boomers simply have not saved enough. Many of these individuals believed that their retirement could be financed by home equity or that their 401(k) account alone was a sufficient savings vehicle.
Whatever the cause of under saving, there is an urgent need for many individuals nearing or in retirement to find a second source of lifetime income. The first source, of course, is Social Security, which in many cases may prove inadequate to cover all retirement expenses.
Households that have accumulated a retirement nest egg via their 401(k) or other means may be planning on withdrawing a planned amount each year during retirement. However, there is no assurance that these savings or investments will continue to provide sufficient purchasing power over a 10, 20 or 30-year period. Occasional market downturns can seriously reduce a retiree’s principal, and periods of low interest rates and inflation can decrease the absolute or relative value of investment income.
For a growing number of retirees, one solution may be the new generation of lifetime income products, such as a fixed annuity. Backed by insurers, these products assure* investors of receiving income throughout their entire retirement, thereby removing the threat of running out of money**. The income thrown off by a lifetime income product also may be a potentially effective diversifier within a larger retirement portfolio.
The guaranteed death benefit offered by many lifetime income products may ensure that the beneficiary (or beneficiaries) will have a postmortem income stream. Beneficiaries also may have access to multiple fund managers to help to potentially maximize returns, and are allowed to dollar-cost-average*** into their investment.
Provided by, Edward Cwalina, senior vice president, investment executive National Penn Investment Services National Penn Investment Services offers a range of financial services inclusive of financial planning, brokerage, securities, and investment services.
Editorial assistance provided by Ben-Abraham Associates
PrimeVest Financial Services, Inc. (PrimeVest) is an independent registered broker-dealer. Member FINRA/SIPC. National Penn Investment Services is a marketing name for PrimeVest which is offering securities at National Penn Bank (NPB) and its affiliates. PrimeVest is not affiliated with NPB or National Penn Investors Trust Company (NPITC), a limited purpose trust company of NPB. Neither NPB or NPITC is a broker-dealer or insurance agency. Ben Abraham Associates is not affiliated with PrimeVest.
Securities and insurance products offered are: ● Not a Deposit ● Not FDIC Insured ● Not Insured by Any Federal Government Agency ● Not Guaranteed by National Penn Bank ● May Lose Value
*Guarantees are backed by the claims paying ability of the issuer. **Lifetime income enhancements may involve higher fees and expenses. ***Dollar cost averaging will not guarantee a profit, or protect you from loss, but may reduce your average cost per share in a fluctuating market. |
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| Investment, securities and insurance products offered are:
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| For more information, please contact: Catharine S. Bower, director of corporate communications at 610.369.6618 or catharine.bower@nationalpenn.com |
Catharine S. Bower
Senior Vice President
Corporate Communications
National Penn Bancshares, Inc.
P.O.Box 547
24 North Reading Avenue
Boyertown, PA 19512
p. 610.369.6618
f. 610.369.6153
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