Healthcare Provider Update: Healthcare Provider for American Electric Power American Electric Power (AEP) typically collaborates with major health insurance providers for its employee healthcare plans, frequently partnering with organizations such as Anthem Blue Cross Blue Shield. This partnership allows AEP to offer comprehensive healthcare benefits to its employees, including access to various medical services, preventive care, and wellness programs. Potential Healthcare Cost Increases in 2026 Looking ahead to 2026, healthcare costs are projected to rise substantially, driven by a perfect storm of factors. Premiums for Affordable Care Act (ACA) Marketplace plans are expected to see median increases of around 20%, with some states experiencing hikes exceeding 60%. A significant contributor to these increases is the potential expiration of enhanced federal premium subsidies, which could result in more than 24 million enrollees facing out-of-pocket costs rising by over 75%. The combination of rising medical costs, increased demand for healthcare services, and insurer rate hikes paints a concerning picture for consumers relying on these plans in the coming year. Click here to learn more
Closed-end funds can be a good fit for American Electric Power employees looking for higher yields and diversification in their Retirement accounts - but you need to weigh the potential for higher returns against the risks with the help of an experienced advisor like myself - Wesley Boudreaux - of the Retirement Group, 'he said.
'American Electric Power employees interested in closed-end funds should consider their investment goals and risk tolerance - consulting with a professional like Patrick Ray at The Retirement Group can help you sort through the maze of these funds.'
In this article we will discuss:
- 1. Closed-end funds - basics versus open-end funds.
2. The strengths and downsides of investing in closed-end funds.
3. Benefits of closed-end funds for income-seeking retirees in a low interest rate environment.
How Much Does a Closed-End Fund Cost?
Numerous American Electric Power clients of ours ask about closed-end funds. An investment corporation called a closed-end fund pools funds from many different investors and invests them in stocks, bonds, and other securities. A fund generally issues a fixed number of shares and buys securities with the proceeds of an initial public offering (IPO). Its capital structure and number of shares are not yet known; the number of shares is fixed (this is why it is called closed-end). Every investor holds some of these holdings in shares.
Closed-end funds may be a good choice for retirees and pre-retirees who want regular income streams. Closed-end funds typically offer higher yields than traditional mutual funds because they are structured to invest in more assets such as real estate and commodities, according to a report by the Investment Company Institute (ICI) in 2021. Closed-end funds may also provide diversification and appreciation of capital. Retirees and pre-retirees should weigh investment goals and risk tolerance before investing in closed-end funds.
A fund's net asset value is its holdings value divided by the number of outstanding shares. Once it goes public, the fund trades on an exchange or the over-the-counter market just like any other security. A professionally managed closed-end fund can be diversified or non-diversified. Investing in the fund may also earn share price appreciation, dividend income and capital gains distributions if the fund sells individual securities at a profit during the year.
Closed-end funds - established in the nineteenth century - are often compared to mutual funds - more famous although younger - which are less well-known. The Investment Company Act of 1940 defines a closed-end company as 'any management company other than an open-end company' (such as a mutual fund). They are both categories of investment companies regulated by the Securities and Exchange Commission but have substantial differences. American Electric Power employees might be curious about the differences and similarities of both types of funds.
Closed-end funds are much older than open-end mutual funds and there are far fewer of them; closed-end funds number in the hundreds, while open-end mutual funds number in the thousands. While a closed-end fund is different from an exchange-traded fund (ETF), there are some similarities our American Electric Power could use understanding. A closed-end fund can invest like an open-end fund. But historically most closed-end funds were bond funds, the largest category being tax-exempt bond funds.
How Is a Closed-End Fund Different From an Open-End Fund?
And like most investment companies, a closed-end fund diversifies by investing in different securities. But we caution our American Electric Power clients that diversification alone cannot deliver a profit or protect against loss. A closed-end fund also provides diversification but also professional management and a consistent investment objective. Like mutual funds, closed-end funds do not collect taxes at the fund level but pass those tax obligations onto shareholders.
The biggest difference between a closed-end and an open-end fund that we want our American Electric Power clients to understand is that while an open-end fund must always be able to redeem your shares directly, most closed-end fund shares are traded on market exchanges and are generally not redeemed directly by the company issuing them. In a closed-end fund, the share count is set at the time of the IPO. Rather, an open-end fund issues and redeems shares daily-hence the name open-end-and the number of shares changes day to day - which affects the fund's net asset value (NAV).
Just like equities, closed-end funds move during the day - and their prices change throughout the day too. That is distinct from an open-end fund whose NAV is calculated only once per day after the markets close. If you want to sell your shares of a closed-end fund, the appetite of other investors to buy them will dictate how easy it is to do so and what price you will get.
Since closed-end funds trade on market exchanges, the market price of a share varies with market supply and demand. If demand exceeds supply, the market price for a closed-end fund's shares may be above its NAV, or net asset value, as the share is intrinsically valued. Demand may outstrip supply and closed-end fund shares may trade below their NAV. Some closed-end fund shares trade at a premium, most trade at a discount. This is not true of open-end funds, which will redeem your shares at NAV on the day you sell (or on the next closing day if you sell after 4 p.m.).
Joan buys 1000 shares of a closed-end mutual fund. She pays USD 14.50 a share. The NAV is USD 15.75. It amounts to Joan getting assets for USD 14,500. Joan sells her stock later for USD 16. She made USD 1,500 ($16,000 - USD 14,500) before transaction fees and commissions. Had she instead bought her shares at USD 16 and sold them at USD 14.50, Joan would have sold her portion of the fund for less than they were worth.
So how Is a Closed-End Fund Different from an Exchange-Traded Fund?
Some American Electric Power clients wonder how closed-end funds differ from exchange-traded funds. Exchange-traded funds are much newer than closed-end funds. A closed-end fund may also technically be an exchange-traded fund. They both trade during the day on main exchanges. But today most ETFs are passively managed. The fund seeks to replicate a given index return as closely as possible. In turn, their market prices closely match the values of the securities in its portfolio, which track the index. Closed-end funds typically trade above or below their NAV.
Interval Funds
A closed-end fund that periodically offers its shareholders the ability to sell back some or all of its shares is called an interval fund. Shareholders notify the fund by a specified date if they want to accept the offer - usually every three to six months or annually - by that date. The actual repurchase will occur at a price determined by the fund's NAV on a specified date, usually shortly after the deadline for notifying the fund of a repurchase decision.
In contrast with many closed-end funds however, an interval fund possesses the characteristics of both closed-end and open-end funds. As with mutual funds, an interval fund might choose to maintain a price tied to the fund's NAV. And unlike many closed-end funds, shares of an interval fund can be priced daily. But because shares are not redeemed daily, the SEC classes them as closed-end funds.
The Strengths of a Closed-End Fund.
Shares in closed-end funds purchased at a discount represent some kind of leverage - the ability to profit both from rising values of the fund's holdings and from rising demand for the shares themselves. This leverage could boost your investment.
Some closed-end funds borrow money at relatively low cost and put it into higher-yielding securities. This can raise a fund's return if interest rates are falling or staying low. However, if interest rates go up or low-cost credit becomes unavailable, leveraged bond funds could underperform other bond funds that use no leverage.
A closed-end fund needs not hold cash for redemptions because it has a fixed number of shares. This capital may be used to try to increase investor returns. Because shareholders do not redeem shares directly, a manager need not sell assets to cover unexpected shareholder redemptions and can instead invest in less liquid securities.
A closed-end fund is not required to accommodate sudden inflows of capital from shareholders like an open-end fund does. Such unexpected inflows may require a fund to buy securities to invest the money - even if the manager thinks the market is expensive already; a closed-end fund manager has no such problem.
The board of directors for a closed-end fund might sometimes decide to convert the fund to an open-end structure. Suppose this happened, investors who bought shares at a discount to the NAV would profit from the difference between their discounted purchase price and the NAV of the new open-end fund.
Because closed-end funds are traded and priced throughout the day instead of just at the end of the business day, you control the price you pay when you sell and the timing of your sales.Closed-end funds have no minimum purchase requirements on the secondary market.It is because closed-end funds are traded on the secondary market; typically they have no marketing expenses like open-end funds do.
Tradeoffs with a Closed-End Fund.
A closed-end fund's market price may fall if investor demand decreases. Demand may decrease if the market perceives the fund or fund manager as bad or other market conditions exist outside of the fund. And the share price may drop despite the fund manager making smart investments and increasing the fund's asset value.
More closed-end funds can invest in illiquid securities than mutual funds - which can be problematic if the fund manager must sell the securities. An illiquid security generally is one that cannot be sold within seven days at the approximate price the fund uses to calculate NAV.
Because leverage magnifies losses as well as increases return, a closed-end fund that uses leverage might underperform an unleveraged fund when its strategy does not work as expected - for instance if interest rates rise or cheap credit contracts become available - as in a credit crisis. Buy-sell agreements could increase losses; if investor demand is down, your shares will drop too.
Even if the fund manager does a good job and the fund's assets appreciate in value, lack of investor demand could cause the fund's market price to drop below your purchase price and the fund's NAV. The fact that they trade at a premium or discount means closed-end funds can be more volatile than their open-end counterparts.If the board of directors issues new shares by way of a rights offering that would dilute the value of the existing shares, the fund can increase its capital.
A closed-end fund is exposed to the same market risks as any fund that invests in stocks or bonds - for instance, the risk that a bond will default, prepay or be called early; a company will go bankrupt; and that interest rates, inflation, credit availability, political or economic conditions, and/or currency risks will affect the fund's holdings.
Closed-end fund performance is less readily available than open-end fund performance. They are sometimes also less liquid.
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You buy a ticket to a limited-time show by investing in closed-end funds. A closed-end fund has a fixed number of shares just like a theater production has fixed seats. Those shares are sold and the show/fund is closed to new investors. Just as a popular play might draw huge crowds for tickets, a successful closed-end fund might draw significant investor interest and potentially better returns. Just as some shows are better than others, you should research and choose a closed-end fund that meets your investment goals and risk tolerance, however.
Added Fact:
A new study from Morningstar published in April 2023 concluded that closed-end funds could be a good fit for income-seeking investors at low interest rates. The study said closed-end funds that focus on high-yield bonds and dividend-paying stocks historically have offered higher yields than open-end mutual funds. This is especially useful for 60-something investors who want regular income streams in retirement. Open-end funds may provide better yields and diversification benefits than traditional retirement investments. (Source: Morningstar, April 2023)
Added Analogy:
Closed-end investing is like joining an elite club with a finite number of memberships. Like the club that gives members special privileges and amenities, closed-end funds offer investors a broad spectrum of investments. Every membership gets a piece of the fund's holdings, with potential gains for investors. As different clubs serve different interests, so too must investors research and select closed-end funds that meet their financial goals and tolerance for risk. Selecting the right 'club' or closed-end fund can provide income generation, potential capital appreciation and diversification for retirees and pre-retirees.
Sources:
1. Reaves Asset Management. 'Retirees: Keep Your Eyes on Income with CEFs.' Reaves Asset Management, https://insights.reavesam.com/blog/retirees-keep-your-eyes-on-income-with-cef?utm_source=chatgpt.com .
2. Investopedia. 'Closed-End vs. Open-End Investments: What's the Difference?' Investopedia, https://www.investopedia.com/ask/answers/042315/what-are-primary-differences-between-closed-end-investment-and-open-end-investment.asp?utm_source=chatgpt.com .
3. InvestmentNews. 'Why Anxious Retirees Should Consider Closed-End Funds.' InvestmentNews, https://www.investmentnews.com/retirement-planning/why-anxious-retirees-should-consider-closed-end-funds/222196?utm_source=chatgpt.com .
4. BlackRock. 'Five Reasons to Consider Closed-End Funds in Your Portfolio.' BlackRock, https://www.blackrock.com/us/individual/education/closed-end-funds/insights/reasons-to-use-closed-end-funds?utm_source=chatgpt.com .
5. Financial Planning. 'Closed-End Funds: From All Angles.' Financial Planning, https://www.financial-planning.com/news/closed-end-funds-from-all-angles?utm_source=chatgpt.com .
How does the AEP System Retirement Savings Plan compare to other retirement plans offered by AEP, and what are the key features that employees should consider when deciding how to allocate their contributions? In particular, how might AEP employees maximize their benefits through the different contribution types available under the AEP System Retirement Savings Plan?
The AEP System Retirement Savings Plan (RSP) is a qualified 401(k) plan that allows employees to contribute up to 50% of their eligible compensation on a pre-tax, after-tax, or Roth 401(k) basis. AEP matches 100% of the first 1% and 70% of the next 5% of employee contributions, making it a valuable tool for maximizing retirement savings. Employees can select from 19 investment options and a self-directed brokerage account to tailor their portfolios. This plan compares favorably to other AEP retirement plans by offering flexibility in contributions and matching opportunities(KPCO_R_KPSC_1_72_Attach…).
What are the eligibility requirements for the AEP Supplemental Benefit Plan for AEP employees, and how does this plan provide benefits that exceed the limitations imposed by the IRS? AEP employees who are considering this plan need to understand how the plan's unique features may impact their retirement planning strategies.
The AEP Supplemental Benefit Plan is a nonqualified defined benefit plan designed for employees whose compensation exceeds IRS limits. It provides benefits beyond those offered under the AEP Retirement Plan by including additional years of service and incentive pay. This plan disregards IRS limits on annual compensation and benefits, allowing participants to receive higher benefits. Employees should consider how these enhanced features can significantly boost their retirement income when planning their strategies(KPCO_R_KPSC_1_72_Attach…).
Can you explain how the Incentive Compensation Deferral Plan functions for eligible AEP employees and what specific conditions need to be met for participating in this plan? Furthermore, AEP employees should be aware of the implications of deferring a portion of their compensation and how it affects their financial planning during retirement.
The AEP Incentive Compensation Deferral Plan allows eligible employees to defer up to 80% of their vested performance units. This plan does not offer matching contributions but provides investment options similar to those in the qualified RSP. Employees may not withdraw funds until termination of employment, though a single pre-2005 contribution withdrawal is permitted, subject to a 10% penalty. Employees need to consider how deferring compensation affects their cash flow and long-term retirement plans(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees achieve their retirement savings goals through the other Voluntary Deferred Compensation Plans offered by AEP? In addressing this question, it would be essential to consider the specific benefits and potential drawbacks of these plans for AEP employees in terms of financial security during retirement.
AEP's other Voluntary Deferred Compensation Plans allow eligible participants to defer a portion of their salary and incentive compensation. These plans are unfunded and do not offer employer contributions, making them ideal for employees seeking additional tax-advantaged retirement savings. However, since they are not funded by the company, participants assume some risk, and the plans may not provide immediate financial security(KPCO_R_KPSC_1_72_Attach…).
What options are available for AEP employees to withdraw funds from their accounts under the AEP System Retirement Plan, and how do these options compare to those offered by the AEP System Retirement Savings Plan? AEP employees need to be informed about these withdrawal options to make effective plans for their post-retirement needs.
Under the AEP System Retirement Plan, employees can access their funds upon retirement or termination, with options including lump-sum payments or annuities. The AEP System Retirement Savings Plan offers more flexibility with in-service withdrawals and various distribution options. Employees should carefully compare these withdrawal choices to align with their retirement needs and tax considerations(KPCO_R_KPSC_1_72_Attach…).
In what scenarios might AEP employees benefit from being grandfathered into their retirement plans, and how does this affect their retirement benefits? A comprehensive understanding of the implications of being grandfathered can provide significant advantages for eligible AEP employees as they prepare for retirement.
AEP employees grandfathered into older retirement plans, such as those employed before 12/31/2000, benefit from higher retirement payouts under previous pension formulas. This offers a significant advantage, as employees can receive more favorable terms compared to newer cash balance formulas. Understanding these grandfathered benefits can help eligible employees plan for a more secure retirement(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees take advantage of the matching contributions offered under the AEP System Retirement Savings Plan and what strategies can be implemented to maximize these benefits? Understanding the contribution limits and matching algorithms of AEP is crucial for employees aiming to enhance their retirement savings.
AEP employees can maximize matching contributions under the AEP System Retirement Savings Plan by contributing at least 6% of their compensation, receiving a 100% match on the first 1% and 70% on the next 5%. To enhance savings, employees should ensure they are contributing enough to take full advantage of the company's match, effectively doubling a portion of their contributions(KPCO_R_KPSC_1_72_Attach…).
What are the key considerations for AEP employees regarding the investment options available in the AEP System Retirement Savings Plan, and how can they tailor their portfolios to align with their long-term financial goals? Employees should be equipped with the knowledge to make informed investment decisions that influence their retirement outcomes.
The AEP System Retirement Savings Plan offers 19 investment options and a self-directed brokerage account, providing employees with a variety of choices to build their portfolios. Employees should evaluate these options based on their risk tolerance and long-term financial goals, aligning their investments with their retirement timeline and desired outcomes(KPCO_R_KPSC_1_72_Attach…).
As AEP transitions into more complex retirement options, what resources are available for employees seeking additional assistance with their benefits, particularly regarding the complexities of the AEP Supplemental Retirement Savings Plan? It’s essential for AEP employees to know where and how to obtain accurate support for navigating their retirement plans.
As AEP introduces more complex retirement options, employees can access resources such as financial advisors, internal retirement planning tools, and educational webinars to navigate their benefits. Understanding these resources can help employees make informed decisions, particularly when dealing with the intricacies of the AEP Supplemental Retirement Savings Plan(KPCO_R_KPSC_1_72_Attach…).
How can AEP employees contact the company for more information regarding their retirement benefits and plans? Knowing the right channels for communication is important for AEP employees to gain clarity and guidance on their retirement options and to address any specific inquiries or uncertainties they may have about their benefits.
AEP employees can contact the company’s HR department or use online portals to access information about their retirement benefits and plans. Timely communication through these channels ensures employees receive support and clarity regarding any concerns or inquiries related to their retirement options(KPCO_R_KPSC_1_72_Attach…).
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