The Economy
The U.S. economy continues to expand. Consumer spending, business investment and employment are all growing at decent rates. We’re also seeing expansion in the Japanese and European economies. They had been lagging.

Some people are concerned that interest rates will move up. But short-term rates, which are heavily influenced by the Federal Reserve Board, should move up. The Fed has purposely kept these rates below the levels indicated by inflation and
economic growth. Meanwhile, long-term rates, which are determined by market forces, have already moved up by over 80 basis points (8/10 of a percent) in concert with the expanding economy.

We judge current, long-term interest rates (and therefore, bond prices) to be fair. We also judge stock prices, on average, to be fair. Some stocks remain underpriced and some remain overpriced but the range in prices is much less than we’ve seen in recent years.

What this means to us is that changes in the prices of individual stocks and companies are likely to be determined by the changes in revenues and earnings of the individual companies. We are spending our time and efforts accordingly.

Frankly, the only thing which we can see capable of throwing the markets off the above track would be dramatic changes in Iraq or acts of terrorism which would upset our politics. With the recent transfer of power to the Iraqis, we should start to see whether the great experiment (allowing a mid-east country to choose democracy) is working.

Proxy Voting Policy
Since publishing our new Proxy Voting Policy three months ago, we’ve received a number of comments from people who believe we’re remiss in our duty to our
shareholders. To respond to that criticism, we’d quote from our Prospectus:

“The investment objective of the Muhlenkamp Fund is to maximize total return to its shareholders through capital appreciation, and income from dividends and interest, consistent with reasonable risk. To pursue its goal, the Fund principally invests in a diversified list of common stocks. The Fund invests primarily in companies determined by the Fund’s adviser to be highly profitable, yet undervalued. The adviser looks for those companies it believes to have above average profitability, as measured by corporate return on equity (ROE)…”

We use Return on Shareholder Equity (ROE) because we believe it is a useful measure of how well the management utilizes the company’s assets for the benefit of shareholders. If we don’t believe that management is working for the
shareholders, we have no interest in owning (shares of) the company.

We do know that management of the companies we invest in will make mistakes in some of their actions, and that not all of their actions will benefit the shareholders. But we also believe that they are in a better position to run their companies than we are. If we didn’t think that a management knew more about running their company than we do, we’d have no interest in investing with that management. So, until they demonstrate otherwise, we’re inclined to give the management of our companies the benefit of the doubt.

Similarly, we know that we will make mistakes. I hope that our shareholders know that we will make mistakes. We believe they hire us because they believe we are working for their best interests and that we’ll make fewer mistakes than they do.
Anyone who doubts that we’re working for their best interests shouldn’t hire us by becoming a shareholder in the Fund.

The new proxy voting rule will require us to keep records of our votes, and presumably, would require us to defend those votes at a future date. To understand the implications of this rule, I ask that you do the following:

To do this well, you would have had to list all your reasons — both quantitative and qualitative — why you made such a decision at the time. Any perusal of investment magazines 3-5 years old will demonstrate the dramatic difference in context over even a few years.

Folks, all we have to offer our shareholders is a bit of knowledge and a certain amount of time. The time we spend documenting the details of our thought process is time taken from our pursuit of finding good investments at good prices. As a result, to better use our time and to simplify this hassle, we have adopted the policy of simply always voting in line with management recommendations.

I’m confident that we’re about to see a number of mutual fund offerings designed to attract those investors concerned about “corporate governance.” A number of these funds already exist. The marketing opportunity will be irresistible to
those who market mutual funds.

Time and experience will demonstrate how they perform.

SEC Ruling
In last quarter’s newsletter (Muhlenkamp Memorandum #70), I wrote to you concerning the increased expenses incurred by the Muhlenkamp Fund since the passage of the Sarbanes-Oxley Act of 2002. I also wrote about two proposed rules that have since been adopted.

On June 23, 2004, the Securities & Exchange Commission (SEC) voted to adopt a number of new rules including:

“Independent directors will be required to constitute at least 75 percent of the fund’s board. An exception to this 75 percent requirement will allow fund boards with three directors to have all but one director be independent.”

Since our board consists of three trustees, it looks like we will qualify for the exception.

“The board will be required to appoint a chairman who is an independent director.”

In the past, we’ve elected our chairman (me), now, I guess, we’ll vote to appoint him (not me).

“Compliance with these amendments will be required 18 months after their publication in the Federal Register.”

Rest assured, we will comply with this amendment.

— Ron Muhlenkamp

The information in this article represents the opinions of the Fund Manager, is
subject to change, and any forecasts cannot be guaranteed.

Investor Education: Overview of Retirement Plan Options for Small Businesses  Back

Click here to see a table of all plan charactistics discussed in this article.

Now more than ever, with the uncertainty of the future of Social Security, people need to take more responsibility for funding their retirements. The Social Security System was established in the mid 1930s and at the current rate will be spending more on benefits than collecting in taxes within the next 15 years. (Social Security Administration) Other projections by the Congressional Budget Office foresee the
System remaining solvent until 2052. No matter which of these projections you might agree with, solvency will be an issue for Social Security at some point in the future.

For those of us of age 50–55 the Social Security Administration tells us that we should receive our benefits as promised. However, the full retirement age has been gradually increasing over time. For example, those born between 1943 and 1954 have a full retirement age of 66 while those born 1960 and later must wait until age 67. There is the option of early retirement with reduced benefits. This means you can retire earlier and receive less money per year, but may actually receive more money overall if you live long enough.

The Social Security System is under stress in large part because the Baby Boom generation is on the verge of retirement. Combined with a lower birthrate in succeeding generations and a longer average lifespan for retirees, it now takes more tax money from fewer workers to support Social Security for one retiree. In 1950, it took 16 workers to support a retiree, and in fact there were 16 workers for each retiree. Today the ratio is 3.3 to 1. At this time the only options available are to reform the System, or to raise taxes and cut benefits.

Those who have small businesses have a variety of options available to save for both their retirement and that of their employees. The accompanying table illustrates the features and limits of the various plans.

Simple IRA
The Simple IRA is a retirement vehicle that has very low administrative costs and is suitable for those businesses with anywhere from 1-100 participants. It is easily established by using either IRS form 5305-S or 5305-SA, which can be obtained from the IRS website, www.irs.gov.

Employee contributions to a Simple IRA are optional with an upper limit of $9,000 and an additional $1,500 catch up contribution for those participants 50 years of age and older.

The employer must make mandatory contributions for all eligible employees. He has the option of makingcontribution in one of two ways. Either the employer will
match the employee deferrals up to 3% of pay or make a 2% of compensation contribution for each eligible employee.

All contributions to this type of plan are immediately and 100% vested.

There are no loans permitted from a Simple IRA. If having this feature is important to the employer, he might want to consider another type of plan.

The tax penalty for early withdrawal of funds from a Simple IRA is a little different than other plan arrangements. If a participant wishes to withdraw from his account within the first two years of establishing the account and he is younger than 59½, the tax penalty is 25%. If it is after the two-year period, it is like other plans at 10%.

The deadline for existing businesses to establish a Simple IRA for 2004 is October , 2004. This can be the only type of plan that a business can sponsor in a plan year. If a business has funded a Simple IRA plan in 2004 and is interested in changing to another type of plan, they must wait until 2005 to establish another plan.

SEP-IRA
Like the Simple IRA, the SEP-IRA has a very low administrative cost if established with either the IRS Form 5305-SEP or Form 5305A-SEP. However, it can also be
established with an IRS-approved prototype document if the employer would like other features such as having the plan integrated with the Social Security Taxable Wage Base.

The SEP-IRA provides the employer with a means of establishing a retirement plan for any number of employees without the requirement of filing a 5500 return with the government. This eliminates an administrative expense typically found in other types of plans.

All contributions to a SEP-IRA are made by the employer at his discretion. The maximum deductible contribution is 25% of eligible compensation, with an upper limit of $41,000 per participant. There is no catch-up provision for those 50 years of age and older. These contributions are immediately and 100% vested for the participants.

The SEP-IRA would not be appropriate for those seeking the additional characteristic of loan availability.

SEP-IRAs must be established by the last day that business taxes are due for the taxable year, including any extensions.

Individual 401(K)
The Individual 401(k) is a popular result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which increased the maximum employer contribution [404(g)] limit for 401(k) profit sharing plans from 15% to 25%.
EGTRRA also increased the individual allocation (415) limits to the lesser of 100% of pay or $40,000 ($41,000 in 2004).

This plan has created rapidly growing interest among businesses with either no employees or no employees who would otherwise be eligible to participate in a plan. Examples of those for whom it would be a consideration are employers
with part time employees or collectively bargained employees. The typical participants would be the business owner, co-owner and spouses.

Although establishment of the plan would require a plan document, administrative costs could be kept to a minimum since there would be no discrimination testing and only those plans with more than $100,000 in assets would require filing a 5500-EZ with the government.

In 2004, the Individual 401(k) would allow a maximum employee contribution of $13,000. The maximum combined (employee plus employer contributions) individual benefit for employees is $41,000 plus an additional catch-up contribution of $3,000 for those 50 years of age and over. The following is an example of how the maximum of $41,000+ could be achieved.

The 52-year old owner of a business makes $112,000 in 2004. If he only had a profit sharing plan, he could only contribute 25% of pay to the plan or $28,000. However, with the addition of the 401(k) feature, the owner would still get the
$28,000 employer contribution, but would also be able to make the maximum 401(k) contribution of $13,000. This would bring him to the maximum of $41,000. Not only that, but since he is over 50 he can make a catch-up contribution of $3,000 bringing his total contribution for 2004 up to $44,000.

Other features of this plan that can be attractive to the business owner are the availability of tax-free loans and hardship withdrawals. Although optional, they can give the owner access to their retirement savings should the need arise.

401(k) Plans
The 401(k) plan has been a popular retirement option to businesses for some time now.

There are some features of this plan that can make it more expensive to administer than those previously discussed. The establishment of the plan requires an IRS-approved document. Several nondiscrimination tests must be satisfied each year in order for the plan to remain in compliance with IRS regulations. Plans that use safe harbor features can automatically satisfy most, if not all, of these tests. In addition, plans with 100 or more participants require an independent audit of the plans financial activity. Plans with 99 or fewer participants are required to have a small plan audit performed each year. However, by having sufficient fidelity bond coverage and having 95% or more of the assets held as “qualifying assets,” this small plan audit requirement can usually be avoided. Also, a yearly filing of Form 5500 is normally necessary. Administrative costs can also be influenced by the
addition of loans, hardship withdrawals, cross-testing or integration features.

The maximum contribution limits of the 401(k) plans are the same as the ndividual 401(k) plan. However, employer match and profit sharing contributions can be discretionary. Also, these plans can be written to be cross-tested or
integrated with Social Security. By doing so, it is possible to give highly compensated employees the ability to receive increased contributions.

Vesting in 401(k) plans is determined by the document and can be immediate, gradual, or subject to “cliff vesting.”

Business owners that establish any type of new plan will normally incur administrative expenses associated with getting the plan started. A tax credit of up to $500 can be used to offset these expenses. This credit can be used during the first three years of the plan’s operation. However, certain restrictions will apply when using this tax credit.

On the horizon – Roth 401(k)
The Roth 401(k) feature is another change in the retirement industry proposed by the EGTRRA legislation. Currently, details are in the planning stages in Congress, but should come to fruition sometime in 2006.

In general, the proposal looks something like this. Just like a Roth IRA, Roth 401(k) employee contributions will be after-tax dollars as opposed to pre-tax 401(k) deferrals. These contributions could have a limit of up to $15,000 per year
with a catch-up provision for those 50 years of age or older. By adopting this characteristic, a plan could provide an excellent way of hedging against the possibility of increasing tax rates as well as the peace of mind to a retiree that not all of his benefits will be taxed when he needs them.

Some concerns that have been raised regarding the Roth 401(k) are an increase of administrative costs and the effects it will have on discrimination testing. These are issues that will be addressed as the final product is defined.

Conclusion
Making the choice of what type of retirement plan to set up is one of the more important decisions that a business owner can make. As you can see, there are plans available to adapt to just about any given situation from the simple to the
complex.

If you would like additional information regarding different types of retirement plans, you can learn about IRAs from the IRS Publication 590, available on their website, www.irs.gov. If you are interested in any other type of qualified plan you might want to contact a third party administrator to help you determine the plan that would best suit your needs.

— Susen Friday

Click here to see a table of all plan charactistics discussed in this article.

 

Of Personal Interest: The Importance of Saving for Retirement Back

We all know that saving for retirement is important, especially with the uncertainty of the Social Security System. However, very few of us have taken an active role in providing for our retirement years

According to the Employment Benefit Research Institute, only 41% of workers aged 20-24 and 54% of those aged 25-34 work for employers which actually sponsor some type of retirement plan. That leaves a lot of people whose only option to save anything for retirement is through either IRA accounts or regular taxable accounts.In addition, of those employees eligible to participate in 401(k) plans,
less than half of those in their twenties do so.

Why is it that those in the age group who have the most to gain from
participation are not doing so? Do they not understand that by starting to save early for retirement they have the advantage of all of those years of compounding and growth of their investments?

There are a variety of legitimate and not so legitimate reasons for this.

One of the reasons is that people in this age group are trying to find their niche in the workforce, and in doing so change jobs frequently. As a result, many are not employed anywhere long enough to become eligible for an employer sponsored plan. However, they do have the option of having an IRA account.

Another reason is the need to meet current expenses. This is the age when
households and families are being established with all of the expenses that
entails. There are rent or mortgage payments, childcare payments and for
many the responsibility of paying off their student loans. Putting aside money
for retirement is not a top priority when other obligations need to be met.

Others just have trouble seeing past today. They cannot visualize being 30, let alone 60. There are also those that just do not understand how the plans work and are intimidated by the process.Plan sponsors have been doing their part in trying to educate their employees. Some have gone as far as making participation mandatory and having employees defer the minimum into the default option of their respective plans.

But more than that is needed. In order for education to be effective, it must begin early when people are in their teens. A great way of starting would be in the high schools with a personal finance class. Reinforcement should come through both parents and the media. They need to know that by contributing even the minimum to either a retirement plan or IRA will put them on the road to building a nest egg. By doing this, putting aside a little something for retirement should become as much of a habit as fastening a seat belt when driving a car.

— Susen Friday

 

Fund Fee Schedule Back

There has been a general increase in the fees charged by our custodial bank, U.S. Bank, N.A. for the various services associated with maintaining your Muhlenkamp Fund IRA / Coverdell Education Savings Account. The current fee schedule is per account and shown below:

Traditional and Roth IRA annual maintenance fee	$15.00*
Coverdell Education Savings Account annual maintenance fee	$15.00*
Transfer to successor trustee	$25.00
Distribution to a participant (exclusive of systematic withdrawal plans)	$25.00
Refund of excess contribution	$25.00
Federal wire fee	$15.00
Reconversion/Recharacterization	$25.00
*Capped at $30.00 per social security number

Please pay particular attention to the annual maintenance fee shown above. This fee has been increased to $15.00 (capped at $30.00 per Social Security number). You can pay this annual fee by October 15th by submitting a check made payable to the Muhlenkamp Fund. With the check please include either the deposit slip that is included with your account statement, or a short note that contains your account number. If you decide not to prepay the annual maintenance fee, it will be deducted from your account following the cut-off date, and a sufficient share value will be redeemed to cover the fee. The address to mail the check to is:

Muhlenkamp Fund
U.S. Bancorp Fund Services, LLC P.O. Box 701
Milwaukee, WI 53201-0701

If you have questions regarding these fees, or need an updated copy of the IRA / Coverdell Education Savings Account Disclosure Statement and Custodial Agreement, please feel free to contact us. You can call us toll-free at (877) 935-5520 ext. 4 from 8:30am to 5:00pm ET, or you can e-mail us at .

Fund Availability Back
The Muhlenkamp Fund is now available to 401(k) plans through the following providers:

If your 401(k) plan is administered by any of the above providers and you are a participant, you can request that your plan sponsor add the Muhlenkamp Fund to your plan. Plan sponsors should contact these providers about including the Muhlenkamp Fund in their plan’s list of investment options. Plan sponsors can learn more about the Muhlenkamp Fund by visiting the website at www.muhlenkamp.com.

Published July 2004.
© 2004.   All rights reserved.