Retirees: Run the Numbers on Munis

Adam Zoll: For Morningstar, I'm Adam Zoll, and welcome to The Retirement Radar. Many investors turned their backs on municipal bonds in 2013, but that may have been a mistake. Here to talk about these and other developments of interest to retirees is Christine Benz, Morningstar's director of personal finance.

Christine, thanks for being with us.

Christine Benz: Adam, it's great to be here.

Zoll: What has driven this rebound in muni bonds since these scares in 2013? We heard about Detroit; we heard about Puerto Rico. But where do things stand now?

Benz: One of the big drivers of muni bonds' relatively strong performance so far in 2014, Adam, has been the fact that we've seen interest-rate worries ebb away. A lot of municipal-bond issuance is long-term. That means that many of these bonds were pretty beaten down in 2013 because of interest-rate worries. They have come back nicely as interest-rate worries have abated.

We've seen really strong performance from certainly long-term muni-bond categories. We've also seen strong performance from some of the more credit-sensitive categories. We've got this category of high-yield muni funds that has returned about 6% so far this year, whereas the typical intermediate-term muni fund has returned about 3% this year, which is decent, too. So strong performance across the board, but especially with longer-duration and/or credit-sensitive bonds.

Zoll: For investors who still are interested in muni bonds, is it too late to get in on this, or are there still opportunities out there?

Benz: I think when you look at munis today, you're probably not seeing the screaming buys that were there at the end of 2013 and coming into 2014. But I do always urge investors to run the numbers; use Morningstar's bond calculator to look at the yields of a muni investment versus a taxable-bond investment.

I looked this morning, there are couple of funds that I like to compare with one another, one a taxable-bond fund, one of muni-bond fund. Right now if you're in the 25% tax bracket, it's roughly a wash in terms of where the yield advantage is. But if you're in the tax bracket above that level, or if you're well above that level, you will see a good bump up in your yield by investing in the muni fund versus the taxable fund.

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Zoll: Switching gears now. One of the more difficult conversations that many retirees and their family members have to have is what their end-of-life wishes are. You say there has actually been some improvement in that area.

Benz: This was some encouraging survey data that showed about three fourths of people over age 60 had drafted advanced directives, or living wells, and they had also named individuals to serve as powers of attorney for financial and health-care matters.

It's encouraging that this number is up substantially from years prior, but I'd like to see it go even higher. I think one impediment for some people when they hear about these documents or they hear about estate-planning, they think it's for the very wealthy. And that's not necessarily true.

In fact, I would say the gold standard, obviously, is to consult with an estate-planning attorney and pay for that plan. But if you cannot do that, some of these documents or templates for these documents are readily available online, and they really make sense for folks at all income levels.

Zoll: Are there any tools or places that families can turn for guidance in terms of guiding them through this process?

Benz: I think oftentimes people hear "estate plan," and they often hear of these documents in the context of estate planning, and they think, "Well, I'm not multimillionaire; this stuff isn't for me."

But really I would say if you're impediment to getting these documents done is that you don't have the money on hand to pay an attorney, there are decent tools on the Web, descent templates that you can download to at least get the basics out there, name the individuals who you'd like to make these decisions on your behalf, and give some direction on your view toward life-extending care, the use of technology to extend your life perhaps longer than you might wish.

The other thing I would point to, Adam, is that there is a program called The Conversation Project that provides some documents for people wishing to have conversations with their loved ones about their view toward life-extending treatment and other matters about their wishes about the end of their lives.

I would urge people to check out The Conversation Project, see what is available on these templates, and then have that conversation with their loved ones about their wishes along the lines of these matters.

Zoll: Also in the news recently, some 401(k) plans have not been serving their participants as well as they are required to. What can you tell us about that?

Benz: There have been recently some lawsuits and subsequent settlements regarding whether plan sponsors were actually fulfilling their fiduciary responsibilities, and specifically whether they were opting for the lowest share class available to plan participants.

In some of these cases, what the settlements found was that, in fact the plan participants were not in the cheapest share class; in some cases, they were in a retail share class versus an institutional share class. So the settlements have generated some pretty nice recoveries for plan participants, something like $300 million so far.

I think the interesting thing, Adam, with some of these lawsuits and settlements is that they're not the small-fry companies. When we think of egregious 401(k) fees, oftentimes we see them in the very small plans. In fact, some of your research has pointed to small plans being much more costly than larger plans. But in fact, we've got some big names here. So General Dynamics, International Paper, and Caterpillar have all been involved in some of these settlements. So, I think it's part of this increasing trend toward shining the light on the cost of 401(k) plans.

For plan participants, we always say, "Do your homework on your plan," to make sure that the plan that you're in is a good one. If it's a high-cost plan, you may be better off just investing enough to earn the matching contributions and then taking additional investable dollars and thinking about investing in some sort of an IRA where you have usually no administrative costs and also you can opt for some very low-cost investment products.

Zoll: Those are definitely some good points to remember when using your 401(k) plan. Christine, thanks for being with us and sharing your thoughts on some recent developments.

Benz: Adam, thank you so much.

Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.