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Money Buzz 12/02

Targeted 401ks, real estate IRAs and more

Keep the Faith

Feeling under the gun? That's understandable. After all, the onus is on you to restore investor confidence.

Some companies are considering doing more than just meet insider trading requirements to overcome investor distrust. While the SEC now demands companies inform investors of insider sales of company stock within two days after a sale, Charles Schwab Corp. may require senior executives to announce intentions prior to the sale-a move investors would appreciate, says Peter Knutson, associate professor emeritus of accounting at the University of Pennsylvania's Wharton School in Philadelphia. "When people on the inside are buying and selling, it's a strong signal of how they're valuing shares."

Other firms are seeking ways to spread the responsibility of meeting the requirements. Some have addressed the new rule that CEOs must certify financial reports by asking senior executives to sign off on numbers first. Knutson notes the action reflects CEOs' awareness that the rule is unreasonable. "There's no way CEOs can know the [reports] are faultless. They're being asked to certify beyond what auditors certify, and auditors send in trained people to do that."



42 million Americans have
$1.7
TRILLION

of retirement funds saved in 401(k) coffers.
SOURCE: Employee Benefit Research Institute

401 OK?

Once heralded as the remedy for an ailing social security system, 401(k) plans are losing their luster in today's topsy-turvy stock market. It's about time people took a closer look at these programs, contends Matthew D. Hutcheson, president of MDH Consulting Inc. in Portland, Oregon, who notes that the pressure of developing a retirement portfolio has long been a source of frustration and anxiety for many employees. "The 401(k) industry has been serving up a platter of financial junk food to America's workers," Hutcheson asserts. "Analysts spend months [examining] different mutual funds before selecting one, yet we go into a meeting and tell participants they have to select their mutual funds in 30 minutes."

Employers looking for a different retirement program for their workers-and themselves-may want to consider adopting a modified program dubbed a "targeted 401(k)," under which variables such as elected deferral, employer matching and profit sharing are optimally determined and redetermined year-to-year to target a specific level of future retirement income.

"A targeted 401(k) takes the burden of choosing investments off of the employee and places it with a professional manager," says Hutcheson, "and enables employees to continually evaluate their retirement portfolio and make adjustments to what they can control-their contribution levels-to ensure that they hit their retirement target." To find out more , log on to www.401khelpcenter.com or www.benefitnews.com.

Retire and Acquire

Is the stock market getting you-and your retirement savings-down? Maybe it's time to consider a little-known retirement alternative: the real-estate IRA. "The bottom doesn't generally fall out of the real estate investment as it may with certain other investments in the stock market," says Tom Anderson, CEO of Portsmouth, New Hampshire-based Pensco Trust Co., who notes that many people don't realize they can diversify by rolling retirement funds into a self-directed IRA and then investing in real estate.



From January to June 2002, there were
3.04
BILLION

Visa debit card transactions vs. 2.96 billion Visa credit card transactions.
SOURCE: Visa USA

How does it work? "It's like any other real estate investment," Anderson explains. "You open an IRA, [take money out of it], find a property you want to invest it in, and go through the closing and registration process." As with any IRA investment, you can sell at any point and incur no taxes on the gains as long as you don't withdraw the fund before age 591/2 . What's more,you can also use your IRA funds to purchase retirement property and then take ownership of it at age 591/2 as a tax-free IRA distribution.

But there's also plenty you can't do. "You have to work with someone who is knowledgeable to avoid setting up a prohibitive transaction," Anderson cautions. For example, while any type of property likely to appreciate in value (such as land, rental property or a commercial building) is fair game, you cannot use IRA funds to purchase a property that you, your spouse, children or parents will live in.

Family Matters

Family-owned businesses are often said to be the backbone of the American economy. So why is it so hard for them to find venture capital? "There's an enormous bias and prejudice among the venture community against family-owned businesses," explains Mark Greenough, president of San Mateo, California-based Greenough Consulting Group. "VCs tend to want control over who will be on the management team, and that's more difficult when there are relationship ties in addition to business interests."

Anticipation of an exit strategy conflict is another concern, adds Stephen Sammut, a venture partner at San Francisco-based private merchant bank Burrill & Co. "It's generally assumed that the family is not seeking to exit the deal the way a VC would and that even if the firm were to go public, it would remain a tightly controlled corporation with the family owning the majority of shares. So there's a dissonance between the VC model and the family ownership model."

To placate potential investors, Sammut suggests that family business owners offer written reassurance of the principals' commitment to the goals and exit strategy-or look elsewhere for a capital infusion. "Concessions may have to be made, with management agreeing to surrender control or decision-making authority regarding relatives who are employees," he says. "While venture capital is worth exploring, family businesses may find their efforts more productive with other sources of capital, such as angel investors and bank loans."


Jennifer Pellet is a New York City-based freelance writer specializing in business and finance.

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This article was originally published in the December 2002 print edition of Entrepreneur with the headline: Money Buzz 12/02.

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