401(k), 403(b), 457 Plan Design & Management

Transcription

1 Index 401(k) Value Proposition Page 2 Traditional or Roth 401(k)? Page 5 Broker Link Option Page 7 Setting up Your 401(k) Page 8 401(k), 403(b), 457 Plan Design & Management January 2019 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor 5131 Standish Drive, Troy, Michigan * * info@fginvestor.com Investment Management Options for 401(k)s Page 9 Select Your Risk Level and Portfolio Type Page 10 Asset Allocation and Portfolio Design Page 11 Asset Class Definitions Page 12 Target Date & Asset Allocation Funds Page 13 Mutual Fund Selection and Analysis Page 15 Building Your Portfolio Page 16 Maintaining Your Portfolio Page 17 Annual 401(k) Review Page 18 Appendix A Page 20 Mutual Fund Analysis Example Appendix B Page 22 Morningstar Analysis Screens For complete disclosure see our website 1

2 Professional 401(k), 403(b), 457 Plan Design & Analysis Value Proposition Your company sponsored retirement savings plan should be your primary savings plan Due to its importance to your retirement future, it should be professionally reviewed annually Why You Should Invest in Your Company Sponsored Retirement Savings Plan? Retirement Future: Pensions are mostly gone and you cannot live on Social Security alone. If you do not save for retirement, you may never retire or end up living in poverty. Tax Savings: Pre-tax money from your pay check is invested, reducing your taxable income. Your account grows tax-deferred enhancing gains. (See chart below) Employer Match (Free Money): Most employers match your first 2% to 4% contribution. This is free money to help you meet your retirement goals. You should contribute as much as you can and at least enough to get the full match. Forced Savings: By taking money out of your pay automatically, it forces you to save and is less noticeable since it comes out before taxes. If you contribute $200 from each paycheck, your actual paycheck will only be reduced by $150 if you are in the 25% tax rate. You should start investing early and invest as much as you can each year. Dollar Cost Averaging: You are investing on a regular basis in Bull and Bear Markets eliminating investor emotion damage. Compounded Returns: Compounding returns in a portfolio can grow substantially over time. With compounding, you earn on your initial investment and accumulated gains each year. (See chart Below) 2

3 Do You Have the Discipline, Training and Tools to Design and Manage your Plan? A professional design and analysis should have the following steps Define your risk tolerance and appropriate allocation to stocks, bonds and cash. List the fund options by asset class group. (Large cap, mid cap, small cap, international, etc.) Create an asset allocation defining the amount in each asset class. We use the PDM Focused Growth Investor Newsletter recommended allocations each year. Grade each mutual fund based on at least its Morningstar star and analyst rating, management history, expense ratio and long term performance over its category. Design your portfolio to the new asset allocation and with the best mutual funds in each category based on grade, last year s performance and this year s performance year-to-date. In the first quarter of each year, review last year s performance compared to the appropriate risk level age-based plan target or asset allocation fund. Review your plan for fund changes. Update your allocation, fund selection and change your contribution elections and current allocations annually. If your design cannot outperform the plan target or asset allocation fund, then invest everything in the appropriate target or asset allocation fund. It is ok to start out with a target asset allocation fund for the first few years until you accumulate more money. Is a Portfolio Design Fee of $100 annually (0.2% on a $50,000 portfolio) Worth It? If a professional design and review can improve your portfolio performance annually by over the 0.2% the $100 fee, you are ahead. For $100 per year we will review your plan options, plan performance and update your portfolio design for you to implement. Performance will be tracked against the appropriate benchmark. The performance feedback will be used to improve the design. 3

4 401(k), 403(b), 457 Employer Sponsored Plans An employer-sponsored retirement-savings plan funded by employee contributions, company matching and profit sharing. First investment choice if company matching. Pre-tax money is invested into the account. Tax-deferred earnings growth. Average employer match is 60% of first 5%. Always contribute enough to take full advantage of the match. The match will go into the Traditional 401(k) pretax and cannot go into a Roth 401(k) post tax. Taxable distributions. (Ordinary income tax rate) RMD at 70.5 years old unless you are still working at the company issuing the 401(k) and own less than 5% of the company. Ok if you transferred other 401(k) s before 70.5 years old. See Uniform Lifetime Table for distribution based on age and year-end value of account. Penalty free distributions after 59.5 years old. 10% penalty for distributions taken before 59.5 years old. At 55 year s old and employment terminated you can take an early partial distribution without a 10% penalty. Funds in company plans are protected by federal law from creditors in bankruptcy and lawsuit judgments, depending on state laws. Annual elective deferred contributions for 2018 are $18,500 and $24,500 if 50 or older at the end of the calendar year. Pace your contributions over the year so you don t hit your own cap too early in the year and miss out on company matches later in the year. Company matches and profit sharing add to the limits above for a combined max of $51, (k) - Defined contribution plan offered by most private and public companies. An employer-sponsored retirement-savings plan funded by employee contributions, 403(b) - Defined contribution plan offered by non-profit hospitals, colleges and public schools. Many 403(b)s are annuity based with higher fees and surrender fees Defined contribution plan offered by state and local governments. Pension - Defined benefit plan offered by about 20% of any type of company. A pension is funded by the company and employees may be required to contribute a percentage of their salary on a pre-tax basis. The payout is based on years of service and age. 401(k) Loans Most advisors do not recommend taking out a loan against your 401(k) unless it is your only option to get emergency cash for food, shelter or medical bills. If your job is not secure, never take out a 401(k) loan. A loan will set you back for retirement savings. Some business owners take a loan against their 401(k) to get a lower interest rate to expand their business. You can generally borrow up to 50% of your 401(k) balance. Loans are generally less than 10 years. The borrowed money is taken out of your 401(k) growth portfolio and no longer grows with the stock market. The interest rate of the loan is generally at or below bank rates. A lower interest rate does not make up for the lost stock market appreciation. You loan payments are taken out of your paycheck after tax reducing your take home pay. If you are no longer working at the company who started your 401(k) most plans will not let you take out a loan. If you are terminated from the company your loan is usually due within 60 days. If you do not have the cash the balance comes out of your investments triggering a 10% penalty and a tax bill. 4

5 Traditional or Roth 401(k)? Typically, you start out in a lower tax bracket, move to a higher tax bracket over your working years and move to a lower tax bracket in retirement. In retirement, it is best to have taxed accounts (only capital gains taxes), traditional IRA s (ordinary income tax rate) and Roth IRA s (tax free) to withdraw from to manage your taxes paid each year. The Traditional 401(k) has pre-tax money going in. Pre-tax money going in gives you more budget flexibility to save more now. Save more now, grow more tax deferred and pay taxes on a larger accumulated amount. Good for higher income workers in a higher tax bracket for a needed tax break. The Roth 401(k) has post-tax money going in. Post-tax money going in gives you less budget flexibility to save more now. Save less now, grow less tax deferred and pay no tax on a smaller accumulated amount. Roth 401(k) the employee contribution is post-tax and can be rolled into a Roth IRA, the employer match contribution may be pre-tax and could be rolled into Traditional IRA depending on the plan. Good for lower income workers in a lower tax bracket now to save on taxes when you are in a higher tax bracket in retirement. A combination of Traditional 401(k) and Roth 401(k) may be best for efficient tax management in retirement. No income restrictions with a Roth 401(k) like a Roth IRA giving you the opportunity to collect some tax-free income in retirement. Common Options Traditional 401(k) only Get maximum tax deferred contribution. Traditional 401(k) contribution of 6% and Roth 401(k) contribution of 3%. Roth 401(k) for first job when in a low tax bracket and Traditional 401(k) in second job when in a higher tax bracket. This decision can often be a wash since many people are in a higher tax bracket during the accumulation phase and a lower tax bracket in the retirement phase. It is often difficult to predict your tax bracket and tax rates in retirement in advance. 5

6 Traditional Pre-Tax 401(k), Roth 401(k) or After Tax 401(k)? Morningstar Study 2017 There are three major types of 401(k) contributions that employees can make: Pretax, Roth, and After-tax. Pretax and Roth are subject to the annual limits of $18,000 (under age 50) and $24,000 (over 50). Yet a higher limit of $54,000 applies to all contributions--not just the employee's own pretax or Roth contributions, but employer-matching contributions, allocations of forfeitures (mainly non-vested assets of employees who have left the plan), and after-tax contributions as well. In every case, asking a simple question clears up whether an after-tax 401(k) makes sense: Are you maxing out the 401(k) already? If you're not putting the full $18,000 (or $24,000 for those 50-plus) into a 401(k), you don't have any reason to make after-tax contributions to the plan. Because their tax benefits are more limited, after-tax contributions will always come up short relative to pretax and Roth contributions. Example 1: Pretax Contributions Jake makes a 15,000 pretax 401(k) contribution for 35 years. His assets grow 5% per year, amounting to $1,354,805 at the end of the 35- year period. When he begins taking withdrawals in retirement, he's in the 25% tax bracket, bringing his after-tax withdrawals to $1,016,104. Example 2: Roth Contributions Emily steers $15,000 of her paycheck into the 401(k) for 35 years, just like Jake. But because she has elected Roth contributions, her money is taxed before it goes into her 401(k). Assuming she's in the 25% tax bracket, she's putting $11,250 into the plan per year; if the money grows tax-free and is tax-free upon withdrawals, her total withdrawal amount will also be $1,016,104. (The Emily and Jake examples illustrate that if someone is in the same tax bracket at the time of contribution and retirement, there's no difference between Roth and pretax contributions, as discussed in this article.) Example 3: After-tax Contributions Andy directs $15,000 of his paycheck to an after-tax 401(k), so his $15,000 contribution drops to $11,250 per year, just like Emily's. The money then compounds tax-deferred; for consistency's sake, let s say it earns 5% and Jake makes the same $11,250 contribution each year for 35 years. At that time, he'd have $1,016,104 in total. However, only his $393,750 in contributions would be eligible for rollover into a Roth IRA. (That money has already been taxed.) The other $622,354--representing his investment earnings--would need to be rolled over into a traditional IRA, where it would be taxed at his ordinary income tax rate upon withdrawal. Assuming he's in the 25% income-tax bracket at that time, his total after-tax withdrawal from both kitties would be $860,516, well below the after-tax take with the Roth or pretax contributions outlined above. When you retire, leaves the company, or takes an in-service distribution from the plan (which only a subset of plans allow), you can take: After-tax contributions can be rolled over to a Roth IRA. Investment earnings that have built up on the initial after-tax contribution can be rolled into a traditional IRA. 6

7 Broker Link Option Keep all your money in the 401(k) Most people do not even have time to manage the one 401(k) let alone another portfolio. 401(k) s portfolios are easier to manage than brokerage account portfolios. So long as your plan has decent funds and is performing well this is the safest choice. Example 2016: Your 401(k) averaged 9.1% annual return over the past 5 years. The benchmark was at 8.2%. Excess return is good at 1.1%. Keep some in your 401(k) and some in Broker Link to manage a stock portfolio Move part of the money to Broker Link and manage a stock portfolio for fun if you truly want to learn about stock investing. Managing a stock portfolio even if you use my newsletter, Investors Business Daily or Motely Fool stocks, is a lot of work and unlikely to outperform your 401(k) over time. You would have to follow the news and stock price each day. This Broker Link does not appear to have an annual fee except for transaction fees on purchase or sale. Keep some in your 401(k) and some in broker-link to manage a mutual fund portfolio Move part or all the money to Broker Link and manage a mutual fund portfolio with picks from my newsletter or your picks. Managing a mutual fund portfolio outside of a 401(k) can be a challenge. If you truly want to learn about mutual funds and managing a portfolio this is good training. Example 2016: PDM portfolio beat your 401(k) most of the years. This option would make sense if you managed it properly. Over the past 5 years my Diversified Mutual Fund & Sector Portfolio Moderate averaged a 9.9% annual return, your 401(k) saw 9.1%. If PDM managed it, your excess return would be lost to a 1% fee. If you managed it, it may not perform as well as my strategic management. 7

8 Setting up Your 401(k) (Below is an example of a plan) Setup Login Create a username and password for your 401(k). Log into your 401(k) plan website and select your Plan Name. Every plan website has a different implementation format. The format often changes. Review your plan often for fund option changes. The plan will notify you if funds are dropped, but don t always tell you when funds are added. Setup Contribution Rate You should be contributing as much as you can from each paycheck in bull and bear markets. Always contribute at least the percent amount to get your full match. Company matches vary from 0% to 6%. If your company match is 4%, then you should contribute at least 4% to get the full match. Try to contribute the max of $18,000 plus match per year (2016). For 50 and older, you can contribute $24,000 plus match. Select Change Contribution Rate or Deferral Change Enter your Contribution Percent taking into account your company match, to get as close as possible to the maximum allowed Traditional 401(k) Percent (Pretax money) x% Roth 401(k) Percent (Post tax money) x% Automated annual contribution increase amount x% (1% until desired amount or manually increase after a raise) Future Contribution Elections (New Money Allocation) Select Change Investments or Change Contribution Select Allocate Future Contributions or Change Your Investment Elections Select I Choose my Own and I Manage My Own Enter the New Recommended Allocations to 100% and Accept the Changes Select the box to say you I Read the Prospectus in the past 90 days for each fund Current Allocations (Rebalance Current Money) Select Rebalance or Reallocate Existing Savings Set your Rebalance Notification to 5% Enter the New Recommended Allocations to 100% and Accept the Changes Change the Future Contribution Elections and the Current Allocations to the new allocation. Your portfolio asset allocation and fund selection should be reviewed at least annually and more often in changing market conditions or if mutual funds are added or removed. By updating your allocations each year, you are rebalancing the portfolio selling some of the overvalued funds and buying some of the undervalued funds. 8

9 Investment Management Options for 401(k)s 1.Do Nothing (30%) Leave the default Target Fund and 0% to 3% contribution rate. (assumed default) Not a good strategy to reach investment goals. 2.Self Plan Review, Monitor and use a Target Fund (30%) Select a Target Fund and increase contribution rate or raise to max of $18,000 + match. Target Date Fund or Asset Allocation Fund. A good place to start your 401(k) for younger employees with a lower amount of accumulated assets. Easiest to manage because you just select the fund for your retirement year and let it go. One fund with a mix of domestic stocks, international stocks and bonds with the proper asset allocation for your risk tolerance and age. Common target date funds are listed below. T. Rowe Price Retirement 2030 (TRRCX) Vanguard Target Retirement 2030 (VTHRX), Vanguard Life Strategy Growth (VASGX) Schwab Target 2030 (SWDRX), American Funds 2030 Target Date Retirement Fund (RFETX), JPMorgan Smart Retirement 2030 (JSMIX) 3.Self Plan Review, Design, Monitor and Implement (30%) Good after accumulating over $10,000 and you are willing to spend the time designing and managing your portfolio. This is good if the plan has quality fund choices in all the primary asset classes. This takes more time to implement and do research. You should review the funds and asset allocation at least annually. Typically select the best fund in each asset class and set the allocations higher and lower in each asset class depending on your forecast. Allows you to invest in the better asset classes and funds and avoid the less favorable ones to possibly help enhance performance. 4.Professional Plan Review, Design and Monitor, Self-Implemented (5%) Pay $100 per year for a professional plan review, design and monitor for you to implement. 5.Plan or Advisor Review, Design, Monitor and Implement (5%) Typical fee is 0.5% for a plan to manage, an advisor could be more. This is good for large accounts for people who have no time to manage their portfolio. The plan will manage your portfolio to your risk level. Managed accounts can outperform target funds over time. Good value proposition if outperforms target fund after fees. Good for older employees approaching retirement that have more money and need financial planning advice. Managed accounts offer a more holistic view of the participant s overall financial situation. Financial Engines is the largest managed account provider. Guided Choice is second. Fidelity is third. Self-Directed Option (5% of people use) Good if the plan fund choices are poor, limited or use high expense funds. Some plans offer a portion of the account to be held by a custodian like Schwab for you to manage. Infinite mutual fund and stock investment choices. Transaction fees could be higher. This takes even more time to implement and do research. You have to calculate the dollar amount for each investment to invest from the percent and individually perform each trade. You should review the stocks, mutual funds and asset allocation at least quarterly. This is only recommended for experienced investors who will take the time to manage the portfolio properly. 9

10 Select your Risk Level and Portfolio Type Risk Tolerance (Risk survey) Risk tolerance is the amount of short-term price volatility and long-term investment loss an investor is willing to withstand before changing their behavior. Risk tolerance also considers the risk level needed to achieve your goals. Risk comes in the form of market risk, security risk, financial risk, valuation risk, economic risk, currency risk, political risk, interest rate risk, inflation risk and liquidity risk. Most investors are not trained to know their risk tolerance. At market tops, most people will say their risk tolerance is high. At market bottoms, they will say they have no tolerance for risk. Volatility is only a problem if you sell. There is long-term risk in not owning equities. Time Horizon The longer your time horizon, the higher the risk you can take. Risk Composure (How did you react in past bull markets, corrections and bear markets?) Risk composure is an investor s ability to consistently understand and correctly perceive the risks they re taking. Risk composure determines whether you are able to effectively stay the course during extreme market volatility, market tops and market bottoms. Unstable perceptions of risk lead to poor investment returns. Achieving goals based on a long-term plan is more important than a benchmark beating returns each year. To participate in bull market gains, you must also endure the risk of corrections and bear markets. Without some risk, reward will likely be small. Fidelity Asset Manager Funds 40% FFANX 50% FASMX 60% FSANX 70% FASGX 85% FAMRX 100% PREIX Risk Category INCOME CONSERVATIVE MODERATE CONSERVATIVE MODERATE MODERATE AGGRESSIVE AGGRESSIVE Fund % Stocks / % Bonds & Cash 40% / 60% 50% / 50% 60% / 40% 75% / 25% 80% / 20% 100% / 0% Risk Description Low Low Medium Medium High High Beta, Standard Deviation (5 / 10 year) B=0.8 / 0.8, SD=5 / 8 B=0.9 / 1.0, SD=6 / 10 B=1.1 / 1.2, SD=7 / 11 B=1.2 / 1.3, SD=8 / 13 B=1.4 / 1.5, SD=9 / 15 B=1.0 / 1.0, SD=10 / 15 Time Horizon 0 years 0 years 5 years 10 years 15 years 20 years Annual Return (Past 5 / 10 years) 6.8% / 5.2% 7.9% / 5.6% 9.0% / 6.0% 10.1% / 6.0% 11.9% / 6.4% 15.9% / 8.2% Best Year Return (Past 10 years) 26% 31% 33% 36% 39% 32% Worst Year Return (Past 10 years) -23% -28% -30% -35% -39% -37% The Risk Category, Risk Description and Time Horizon are defined by PDM Investment Services. The other numbers are from Morningstar ending December Beta is volatility relative to the S&P 500 of 1.0 and Standard Deviation is return variation from the mean. Past returns are used for comparison between risk categories only. Future returns may be significantly different and are not guaranteed in the future. Money Large Cap Large Cap Small Cap International Natural Emerging Markets Value Growth Value Resources Markets Bonds Financial Healthcare Mid Cap Technology Small Cap Growth Very Low Risk Moderate Risk High Risk 10

11 Asset Allocation and Portfolio Design Besides the global stock market, the largest contributor to a portfolio s long-term performance relative to its benchmark is an optimal asset allocation. Based on studies, a portfolio s asset allocation contributes about 70% of a portfolio s performance. Asset Allocation is the most important tool used in portfolio design and management. Security selection is next largest contributor to a portfolio s performance. Tactical asset allocation, also called market timing is not recommended because of its difficulty in producing consistent value. Asset allocation is a systematic way of diversifying a portfolio among different asset classes with varying correlations to each other. Asset allocation determines the mix of asset classes and sectors used to create a portfolio to meet its specified goals and risk level. The most common asset classes are large cap growth, large cap value, mid cap growth, mid cap value, small cap growth, small cap value, international, sectors, bonds and cash. Some sectors perform better in some parts of the economic cycle and worse in other parts. Diversification of non-correlated asset classes will help reduce volatility in a portfolio. Diversification is not a return-enhancement tool it is a risk-reduction tool. Once you have selected a risk level and portfolio type, select investments in each asset class to build your portfolio to the recommended allocations. Listed below are base allocations for each portfolio risk level. Diversified Mutual Fund Portfolio Asset Allocation RISK LEVEL INCOME INCOME CONSERVATIVE CONSERVATIVE MODERATE MODERATE AGGRESSIVE AGGRESSIVE BASE ASSET CLASS 40% Stocks 60% Bonds & Cash 50% Stocks 50% Bonds & Cash 60% Stocks 40% Bonds & Cash 75% Stocks 25% Bonds & Cash 80% Stocks 20% Bonds & Cash 90% Stocks 10% Bonds & Cash Large Cap Growth 10% 10% 12% 15% 15% 15% Large Cap Value 10% 10% 11% 12% 10% 8% Mid Cap Blend 10% 10% 15% 17% 17% 20% Small Cap Growth 0% 4% 5% 7% 8% 11% Small Cap Value 5% 6% 7% 9% 10% 11% International 5% 10% 10% 10% 15% 15% Emerging Markets 0% 0% 0% 5% 5% 10% International Bond 5% 5% 5% 5% 5% 2% High Yield & Bank Loan 10% 10% 10% 5% 5% 3% Intermediate Term Bond 20% 15% 10% 5% 3% 0% Short Term Bond 15% 10% 10% 5% 2% 0% Money Market 10% 10% 5% 5% 5% 5% 11

12 Asset Class Definitions Large Cap Stocks Large cap stocks are multi-national companies with over $11 billion in market cap. They comprise 70% of the domestic stock market. Mid Cap Stocks Mid cap stocks are companies with between $2 and $10 billion in market capitalization. They comprise 20% of the domestic stock market. Small Cap Stocks Small cap stocks are companies with less than $2 billion in market capitalization. They comprise 10% of the domestic stock market. Small Cap stocks tend to outperform large cap in the recovery year of the economic cycle, when GDP is rising, when in risk-on low volatility mode and when the S&P 500 is strong. Growth Stocks Growth stocks are companies that are growing earnings by at least 10% annually. Their share price is typically higher than current earnings estimates anticipating growth. They are typically more volatile than value stocks. Value Stocks Value stocks are companies that currently have lower earnings growth. They are priced lower than current earnings estimates. They are considered stocks on sale waiting for future growth. Value stocks tend to outperform with falling GDP, risk-off higher volatility and in the transition and correction stage of economic cycle. International Funds International mutual funds invest in stocks listed on foreign exchanges and some domestic companies with high sales overseas. The most common type of international fund is a diversified developed market fund. There are also more aggressive international funds like emerging market funds that invest in China, Asia, Latin America, the Middle East and Africa. Sector Funds Sector funds invest directly into specific sectors. The eight largest sectors of the economy are financial, healthcare, technology, retail, energy, materials, industrial and utilities. Investing in higher growth sectors can enhance returns. In each phase of the economic cycle, certain sectors outperform others. Asset Class Funds and Index Funds Asset class mutual funds invest in specific asset classes like large cap growth, large cap value, mid cap growth, small cap growth and small cap value. Bond Funds Bond mutual funds invest in corporate or government bonds. Bonds vary in maturity time, risk and type. The total return of a bond or bond fund is based on the dividends it pays and the change in net asset value. As interest rates rise, the price of the bond fund falls, reducing its total return. The higher the duration of the bond, the more it is affected by the change in interest rates. The opposite is true when interest rates fall. A 1% rise in long-term rates would mean that a bond with a 10-year duration will be expected to fall 10% in value. Muni bonds are long term bonds so they would suffer also. A bond with a 2-year duration would only fall modestly. Money Market Funds Money Market mutual funds invest in cash type investments or ultra-short-term bonds. Most money market funds are FDIC insured. 12

13 Target Date & Asset Allocation Funds (07/24/2017) No load versions of funds. T. Rowe Price Retirement Target Funds (Top rated PDM) Expense ratio 0.70% to 0.75%, 18 Active Managed Price Funds, LC=75%, MC=19%, SC=6%, Large Cap Growth/Blend, Morningstar A Moderate Risk Performance YTD/3yr/5yr/10yr = 12.9%/6.6%/11.9%/5.8%, Alpha = +2.5%. T. Rowe Price Retirement 2050 TRRMX (90%/10%) (60% US, 30% INT, 10% Bond & Cash) Aggressive Risk T. Rowe Price Retirement 2040 TRRDX (85%/15%) (57% US, 28% INT, 15% Bond & Cash) Moderate-Aggressive Risk T. Rowe Price Retirement 2035 TRRJX (80%/20%) (55% US, 25% INT, 20% Bond & Cash) Moderate-Aggressive Risk T. Rowe Price Retirement 2030 TRRCX (75%/25%) (50% US, 25% INT, 25% Bond & Cash) Moderate Risk T. Rowe Price Retirement 2025 TRRHX (70%/30%) (45% US, 25% INT, 30% Bond & Cash) Moderate Risk T. Rowe Price Retirement 2020 TRRBX (60%/40%) (40% US, 20% INT, 40% Bond & Cash) Moderate-Conservative Risk American Target Funds (Top rated PDM) Expense ratio 0.40% to 0.45%, 20 Active Managed AF Funds, LC=84%, MC=12%, SC=4%, Large Cap Growth/Blend, Morningstar grade A Moderate Risk Performance YTD/3yr/5yr/10yr = 11.3%/6.6%/12.3%/6.0%, Alpha = +2.5%. AF 2050 Target Date Retirement RFITX (85%/15%) (55% US, 30% INT, 15% Bond & Cash) Aggressive Risk AF 2040 Target Date Retirement RFGTX (85%/15%) (55% US, 30% INT, 15% Bond & Cash) Moderate-Aggressive Risk AF 2035 Target Date Retirement RFFTX (80%/20%) (50% US, 30% INT, 20% Bond & Cash) Moderate-Aggressive Risk AF 2030 Target Date Retirement RFETX (70%/30%) (45% US, 25% INT, 30% Bond & Cash) Moderate Risk AF 2025 Target Date Retirement RFDTX (60%/40%) (40% US, 20% INT, 40% Bond & Cash) Moderate-Conservative Risk AF 2020 Target Date Retirement RRCTX (50%/50%) (35% US, 15% INT, 50% Bond & Cash) Conservative Risk Vanguard Target Retirement Funds (Simple low cost 4 fund portfolio) Expense ratio 0.15%, 4 Vanguard Index Funds, LC=76%, MC=18%, SC=6%, Large Cap Blend, Morningstar grade A Moderate Risk Performance YTD/3yr/5yr/10yr = 12.6%/5.8%/10.7%/5.2%, Alpha = +1.0%. Vanguard Target Retirement 2050 VFIFX (90%/10%) (55% US, 35% INT, 10% Bond & Cash) Aggressive Risk Vanguard Target Retirement 2040 VFORX (85%/15%) (50% US, 35% INT, 15% Bond & Cash) Moderate-Aggressive Risk Vanguard Target Retirement 2035 VTTHX (80%/20%) (50% US, 30% INT, 20% Bond & Cash) Moderate-Aggressive Risk Vanguard Target Retirement 2030 VTHRX (70%/30%) (45% US, 25% INT, 30% Bond & Cash) Moderate Risk Vanguard Target Retirement 2025 VTTVX (65%/35%) (40% US, 25% INT, 35% Bond & Cash) Moderate Risk Vanguard Target Retirement 2020 VTWNX (55%/45%) (35% US, 20% INT, 45% Bond & Cash) Conservative Risk Fidelity Asset Manager Funds (PDM Benchmark) Expense ratio 0.65% to 0.75%, > 1000 Individual Stocks and ETFs, LC=71%, MC=22%, SC=7%, Large Cap Growth/Blend, Morningstar B Moderate Risk Performance YTD/3yr/5yr/10yr = 11.6%/5.8%/10.2%/5.4%, Alpha = +2.0%. Fidelity Asset Manager 85% FAMRX (85%/15%) (50% US, 35% INT, 15% Bond & Cash) Moderate-Aggressive Risk Fidelity Asset Manager 70% FASGX (75%/25%) (45% US, 30% INT, 25% Bond & Cash) Moderate Risk Fidelity Asset Manager 60% FSANX (65%/35%) (40% US, 25% INT, 35% Bond & Cash) Moderate-Conservative Risk Fidelity Asset Manager 50% FASMX (55%/45%) (35% US, 20% INT, 45% Bond & Cash) Conservative Risk 13

14 Target Date & Asset Allocation Funds (07/24/2017) No load versions of funds. Schwab Target Funds Expense ratio 0.45% to 0.65%, 25 Active Managed Funds, LC=65%, MC=24%, SC=11%, Large Cap Blend, Morningstar grade B Moderate Risk Performance YTD/3yr/5yr/10yr = 10.9%/5.8%/10.6%/5.4%, Alpha = +1.0%. Schwab Target 2050 SWNRX (90%/10%) (60% US, 30% INT, 10% Bond & Cash) Aggressive Risk Schwab Target 2040 SWERX (85%/15%) (60% US, 25% INT, 15% Bond & Cash) Moderate-Aggressive Risk Schwab Target 2035 SWIRX (75%/25%) (55% US, 20% INT, 25% Bond & Cash) Moderate-Aggressive Risk Schwab Target 2030 SWDRX (70%/30%) (50% US, 20% INT, 30% Bond & Cash) Moderate Risk Schwab Target 2025 SWHRX (60%/40%) (45% US, 15% INT, 40% Bond & Cash) Moderate-Conservative Risk Schwab Target 2020 SWCRX (50%/50%) (35% US, 15% INT, 50% Bond & Cash) Conservative Risk Fidelity Freedom Target Funds Expense ratio 0.70% to 0.80%, 30 Active Managed Fidelity Funds, LC=74%, MC=17%, SC=9%, Large Cap Growth/Blend, Morningstar B Moderate Risk Performance YTD/3yr/5yr/10yr = 12.4%/6.6%/10.2%/5.0%, Alpha = +1.5%. Fidelity Freedom 2050 FFFHX (90%/10%) (55% US, 35% INT, 10% Bond & Cash) Aggressive Risk Fidelity Freedom 2040 FFFFX (90%/10%) (55% US, 35% INT, 10% Bond & Cash) Aggressive Risk Fidelity Freedom 2035 FFTHX (90%/10%) (55% US, 35% INT, 10% Bond & Cash) Moderate-Aggressive Risk Fidelity Freedom 2030 FFFEX (80%/20%) (50% US, 30% INT, 20% Bond & Cash) Moderate Risk Fidelity Freedom 2025 FFTWX (65%/35%) (40% US, 25% INT, 35% Bond & Cash) Moderate-Conservative Risk Fidelity Freedom 2020 FFFDX (60%/40%) (35% US, 25% INT, 40% Bond & Cash) Conservative Risk Vanguard Life Strategy Funds Expense ratio 0.20%, 4 Vanguard Index Funds, LC=75%, MC=18%, SC=7%, Large Cap Growth/Blend, Morningstar A Moderate Risk Performance YTD/3yr/5yr/10yr = 11.4%/6.2%/11.1%/5.0%, Alpha = +1.5%. Vanguard Life Strategy Growth VASGX (80%/20%) (50% US, 30% INT, 20% Bond & Cash) Moderate-Aggressive Risk Vanguard Life Strategy Mod-Growth VSMGX (60%/40%) (35% US, 25% INT, 40% Bond & Cash) Moderate-Conservative Risk Vanguard Life Strategy Con-Growth VSCGX (40%/60%) (25% US, 15% INT, 60% Bond & Cash) Conservative Risk JPMorgan Smart Retirement Funds Expense ratio 0.60% to 0.70%, 25 Active Managed JPM Funds, LC=73%, MC=22%, SC=5%, Large Cap Blend, Morningstar grade A Moderate Risk Performance YTD/3yr/5yr/10yr = 14.3%/6.0%/11.6%/x, Alpha = +1.0%. JPMorgan Smart Retirement 2050 JTSIX (85%/15%) (55% US, 30% INT, 15% Bond & Cash) Aggressive Risk JPMorgan Smart Retirement 2040 SMTIX (80%/20%) (50% US, 30% INT, 20% Bond & Cash) Moderate-Aggressive Risk JPMorgan Smart Retirement 2035 SRJIX (75%/25%) (50% US, 25% INT, 25% Bond & Cash) Moderate Risk JPMorgan Smart Retirement 2030 JSMIX (70%/30%) (45% US, 25% INT, 30% Bond & Cash) Moderate Risk JPMorgan Smart Retirement 2025 JNSIX (60%/40%) (40% US, 20% INT, 40% Bond & Cash) Moderate-Conservative Risk JPMorgan Smart Retirement 2020 JTTIX (50%/50%) (35% US, 15% INT, 50% Bond & Cash) Conservative Risk 14

15 Mutual Fund Selection and Analysis Security selection is next largest contributor to a portfolio s performance. Go to your plan website and print the Fund Option & Performance Report. Research each mutual fund using Morningstar, another mutual fund rating service, the fund prospectus, or fund reports on the plan website. Most plans offer some mutual fund research. Below is a list of criteria to consider when grading a mutual fund. Start by looking up the first three items listed below at minimum, then review the additional criteria. See the Morningstar Screens at the back of the presentation. Many plans are starting to offer passive managed index funds for each asset class. These funds contain stocks in the indexes and have lower internal costs. If there are no better active funds, use the passive index funds. Assign a letter grade based on the parameters above. Basic Mutual Fund Analysis (Critical Parameters) Fund Ticker Symbol If the plan does not contain the fund 5-digit ticker symbols, search for the fund names using Google or Morningstar. If the fund is private and not traceable to independent research, use the plan provided specification sheets. Fund Asset Class LCG, LCV, MCG, MCV, SCG, SCV, INT, BOND, MM, etc. Fund Grade - Morningstar 4-star or 5-star and a gold or silver rating are best. Performance Look for funds that outperformed their category by at least 2% annually over the past three, five and ten year periods. Look for funds that outperformed their category at least 70% of the past 10 years. Manager Over 5 years managing the fund. An MBA degree from a top school and CFA designation. Manager has over $500,000 of personal money invested in the fund. Expense Ratio Less than 0.9% expense ratio is good. Premium Mutual Fund Analysis (Additional Parameters) Strategy A sound investment strategy using proven techniques like fundamental and valuation analysis. Turnover Rate Less than 30% turnover is good. Fund Size Less than $8 billion fund size is good. Volatility Look for funds that have a beta of less than 1.2. Variation Look for funds that have a standard deviation less than its category. Risk Adjusted Return Look for funds that have a Sharpe Ratio higher than its category. Maximum Downdraft Look for funds that have a lower downdraft than its category. Upside/Downside Capture Ratio Look for funds that have a ratio greater than one. Valuation Look for funds that have the same or lower PE ratio than its category. Sustainability Environmental, social and governance policy. See appendix B for Premium Mutual Fund Analysis Example. See Appendix C for Morningstar Analysis Screens. 15

16 Building Your Portfolio Select the highest rated funds in each asset class and allocate to the asset allocation that meets your risk tolerance and time horizon. Below is an example of a moderate and aggressive portfolio design. If sector funds are offered, they may be incorporated in the portfolio. Most plan websites have portfolio builder tools and investor education. Some plans offer a portfolio manager service for an annual fee of around 0.5% of assets under management Leaders in bold. MODERATE PORTFOLIO TICKET ASSET ALLOCATION GRADE (75% Stocks / 25% Bonds & Cash) SYMBOL CLASS JPMorgan Large Cap Growth (JPMJT) JLGMX LCG 11% B Vanguard Equity Income Admiral VEIRX LCV 16% A PRIMECAP Odyssey Aggressive Growth POAGX MCG 7% A JPMorgan Mid Value FLMVX MCV 11% A Vanguard Extended Market Index VIEIX SCG MCG 6% B T. Rowe Price US Small Cap Value PRSVX? SCV 10% B American Funds Euro Pacific Growth R4 RERGX INT LCG 5% B Templeton Inst. Foreign Small Cap TFSCX INT MCV 6% B Invesco Developing Markets GTDIX INT EM MKT 3% B PIMCO Total Return (Y=3.4%, D=5yrs, Q=NR) PTTRX ITB 10% B PIMCO Income Fund (Y=3.7%, D=3yrs, Q=NR) PIMIX MULTI BD 10% B Vanguard Prime Money Market Fund VMRXX MONEY MKT 5% B Asset Class Key LCG-Large Cap Growth, LCV-Large Cap Value, MCG-Mid Cap Growth, MCV-Mid Cap Value, SCG-Small Cap Growth, SCV-Small Cap Value, INT-International, INT EM MKT-International Emerging Market, INT BOND-International Bond, HY BOND-High Yield Bond, IT BOND- Intermediate Term Bond, ST BOND-Short Term Bond, MM-Money Market. 16

17 Maintaining Your Portfolio Each year you should review your plan and update your portfolio. Managing a 401(k) can be a challenge due to the following reasons. Companies have been changing to different plans lately. (Start the process from scratch) Plan websites change. (Each time you go on the website to change your allocations the process may be different) Plan funds are removed and new ones added each year. (Research new funds) At a minimum every year in the first quarter do the following: Review plan for fund offering changes. Re-grade mutual funds and replace bad ones with good ones. Change the asset allocation for the new-years economic and market conditions. Rebalance your portfolio. Rebalancing reduces a portfolio s tendency to drift from its target asset allocation and acquire risk-return characteristics that may be inconsistent with an investor s goals and preferences. For most diversified stock and bond portfolios, annual or semiannual monitoring - with rebalancing at 5% thresholds - is likely to produce a reasonable balance between risk control and cost minimization. If an asset class becomes overvalued, you will be selling when it s up. If an asset class becomes undervalued, you will be buying when it s down. Human emotions influence investors in their decision-making process. Investors often behave irrationally, producing inefficient markets and mispriced securities. These mispriced securities create short-term opportunities for the intelligent investor, but hurt the average investor. The ability to buy low and sell high is nearly impossible to do consistently. Create a solid diversified portfolio and stick with it through the ups and downs of the market. Experience and a calm rational decision making process are needed to guide you through volatile markets. Portfolio Performance Monitor Every January, at a minimum, your portfolio should be reviewed for performance. Your portfolio performance for the year can be found on your December brokerage statement or the custodian website. Performance can be calculated by using the beginning of the year balance, end of the year balance and making adjustments for cash inflows or outflows. Below are common benchmarks to compare your portfolios with. 2017: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 18.7% return. 2016: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 7.1% return. 2015: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a -0.6% return. 2014: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 5.6% return. 2013: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 20.1% return. 2012: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 14.1% return. 2017: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 22.3% return. 2016: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 7.4% return. 2015: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a -0.6% return. 2014: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 5.9% return. 2013: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 25.2% return. 2012: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 15.9% return. 17

18 Annual 401(k) Review Why invest in a 401(k), 403(b) or 457 plan? Forced savings, tax deferred gains, lower your tax rate, free match money, compounding growth and income to supplement social security income in retirement. Is your 401(k) set up correctly and on track to meet your retirement goals? Review your full year-end statement and website every year for the information below. Free review for 25 to 35 year children of clients, family and friends. Most plans start your 401(k) in a default mode. See the example below. Your 401(k) is typically your primary retirement saving vehicle, so it is very important it is set up correctly. Contributions Employee contribution rate 4% At least up to the match, max is $18k or $24k@50 plus match Employer match rate 4% 100% Vested or on a schedule Traditional pre-tax 401(k) contribution rate 4% Tax break now, lower tax rate in retirement. (Match goes here) Roth post-tax 401(k) contribution rate 0% Tax break later, higher tax rate in retirement. Verify your annual dollar contribution $6,000 * Is the correct dollar amount going in? Are you close to the max? Auto contribution increase Off On or turned off and reviewed manually each year. Investments and Allocation Stock & bonds/cash allocation 85%/15% See the table below for your risk tolerance. Mutual fund portfolio % Target Age Fund or diversified mix of funds. Current money and new money allocation Same Is the new and current money % correct in each fund? Auto re-balance setting Off On or off if you enter a new portfolio each year or target fund. Performance and Balance Review your balance each year $7,000 * Make sure your balance is rising at the correct rate each year. Review annual rate of return each year 6% * Compare to the appropriate benchmark below. Plan Annual Fees 0.2%* Plan annual fees typically 0.1% to 0.2% or $20 to $80. Beneficiaries Primary beneficiaries Spouse 100% * Secondary beneficiaries Children 50%/50% * Portfolio Asset Allocation & Risk Table Fidelity Asset Manager Funds 40% FFANX 50% FASMX 60% FSANX 70% FASGX 85% FAMRX 100% PREIX Risk Category INCOME CONSERVATIVE MODERATE CONSERVATIVE MODERATE MODERATE AGGRESSIVE AGGRESSIVE Fund % Stocks / % Bonds & Cash 40% / 60% 50% / 50% 60% / 40% 75% / 25% 80% / 20% 100% / 0% Risk Description Low Low Medium Medium High High Beta, Standard Deviation (5 / 10 year) B=0.8 / x, SD=5 / x B=0.9 / 1.0, SD=6 / 10 B=1.0 / x, SD=7 / x B=1.2 / 1.3, SD=8 / 13 B=1.4 / 1.5, SD=10 / 15 B=1.0 / 1.0, SD=10 / 15 Time Horizon 0 years 0 years 5 years 10 years 15 years 20 years Annual Return (Past 5 / 10 years) 6.4% / x 7.2% / 4.9% 8.2% / x 9.0% / 5.0% 10.4% / 5.1% 14.4% / 6.7% Best Year Return (Past 10 years) 26% 31% 33% 36% 39% 32% Worst Year Return (Past 10 years) -23% -28% -30% -35% -39% -37% The Risk Category, Risk Description and Time Horizon are defined by PDM Investment Services. The other numbers are from Morningstar ending December Beta is volatility relative to the S&P 500 of 1.0 and Standard Deviation is return variation from the mean. Past returns are used for comparison between risk categories only. Future returns may be significantly different and are not guaranteed in the future. T. Rowe Price Retirement 2050 TRRMX (90%/10%) (60% US, 30% INT, 10% Bond & Cash) Aggressive Risk T. Rowe Price Retirement 2040 TRRDX (85%/15%) (57% US, 28% INT, 15% Bond & Cash) Moderate-Aggressive Risk T. Rowe Price Retirement 2035 TRRJX (80%/20%) (55% US, 25% INT, 20% Bond & Cash) Moderate-Aggressive Risk T. Rowe Price Retirement 2030 TRRCX (75%/25%) (50% US, 25% INT, 25% Bond & Cash) Moderate Risk T. Rowe Price Retirement 2025 TRRHX (70%/30%) (45% US, 25% INT, 30% Bond & Cash) Moderate Risk 18

19 Annual 401(k) Review Summary Your Name: Plan Name: Date/Year: Plan Type: Custodian: Contributions Employee contribution rate & dollar amount Action (Raise or auto raise) Employer match rate & dollar amount Vesting period Traditional pre-tax 401(k) contribution rate Roth post-tax 401(k) contribution rate Auto contribution increase on/off Investments and Allocation Stock & bonds/cash allocation Risk level Target Age Mutual fund portfolio Diversified Mutual Fund Portfolio Current & new money allocation same Performance and Balance Account balance each year Annual rate of return to benchmark Plan Annual Fees Beneficiaries Primary beneficiaries Secondary beneficiaries PDM Investment Services, Philip Michalek, , 19

20 Appendix A Mutual Fund Analysis Example Strategy The PRIMECAP Odyssey Growth Fund is in the Large Cap Growth asset class. Joel Fried has been manager since 2004 and has over $1,000,000 of his own money in the fund. He has an MBA degree. The fund is tax efficient and has a high sustainability rating by Morningstar. Management looks for companies that have grown rapidly in the past and have good potential to continue the growth but that have become temporarily cheap for some reason. Stocks are sold when the company or the economic environment has shifted significantly or for valuation reasons. They tend to have more-pronounced sector bets. Technology and healthcare at above benchmark ratings The turnover rate is low at 9%. The fund has a low expense ratio of 0.65%. The fund size is medium at $11 billion in assets under management. Performance The fund outperformed its category by 4% annually in the past 3 years, by 4% in the past 5 years and by 3% in the past 10 years. POGRX Category: LG S&P 500 TR USD 35K 30K 25K 20K 15K 10K History (12/31/2017) POGRX S&P 500 TR USD Category (LG) / S&P 500 TR USD / Category (LG) Annual Report Net Expense Ratio Turnover Ratio Rank in Category Fund Category LG LG LG LG LG LG LG LG LG LG LG Category: LG return as of 12/31/2017 S&P 500 TR USD return as of 12/31/2017 POGRX return as of 12/31/2017 Source: Print page to PDF. 20

21 Performance Consistency The fund has outperformed its category in over 80% of the years between 2005 and Risk & Reward The fund volatility and variation are the same as its category. The risk-adjusted return is higher than its category risk-adjusted return. The maximum downdraft was 34% in 2008, less than the S&P 500 loss of 37%. The up/down capture ratio is positive at 1.1. Valuation The fund valuation is lower than its category. Summary This fund is strong with an A overall rating, making it one of the best funds in its category. The fund is OPEN to new investors with a $2,000 minimum for taxable accounts and $1,000 for IRAs. The fund is no-load but carries a transaction fee through TD Ameritrade and Schwab. 21

22 Appendix B - Morningstar Analysis Screens Standard Version Free Premium Version - $189 per year Quote Screen Locate the fund ticker symbol, Morningstar grade and asset class. YACKX, 5 start gold, Large Cap Blend Turnover Rate Less than 30% turnover is good. 7% Expense Ratio Less than 1.1% expense ratio is good. 0.76% Fund Size Less than $8 billion fund size is good. $11.3 billion. 22

23 Morningstar Analysis Screens Standard Version Performance Screen Performance Consistency - Look for funds that outperformed their category at least 70% of the past 10 years. Performance - Look for funds that outperformed their category by at least 2% annually over the past three, five and ten year periods. Maximum Downdraft Look for funds that have a lower downdraft than its category. 23

24 Morningstar Analysis Screens Management Screen Standard Version Analysis Screen - Premium Version Management & Analysis Screen Manager - Look for a manager with over 5 years managing the fund an MBA degree from a top school and CFA designation and over $500,000 of personal money invested in the fund. Strategy - Look for a sound investment strategy using proven techniques like fundamental and valuation analysis. 24

25 Morningstar Analysis Screens Standard Version Ratings & Risk Screen Volatility Look for funds that have a beta of less than 1.2. Variation Look for funds that have a standard deviation less than its category. Risk Adjusted Return Look for funds that have a Sharpe Ratio higher than its category. Upside/Downside Capture Ratio Look for funds that have a ratio greater than one. Alpha Look for funds that have an alpha greater than two, 2% better performance than its category. 25

26 Morningstar Analysis Screens Standard Version Portfolio Screen Valuation Look for funds that have the same or lower PE ratio than its category. 26