Retirement planning has become a very much a trick or treat landscape to navigate. Numerous products will be found in your 401(k) plans in the near future that might not prove to be the best solution for the investment dilemma your retirement accounts are in. And with Halloween just around the corner, perhaps we should look at some of the treats in your bag.
Inside Your 401(k)
Let's start with the easiest one to talk about, the index fund. This investment offering is in your 401(k) account and offers low fees, which is good, they offer of low volatility, which is attractive after last year, and the promise of steady returns. They mimic a published index and they follow those stocks to meet or beat that index all while providing you with enough of a risk return relationship that will get you to retirement. They are not your favorite trick or treat sweet; the one you will eat after the good stuff is gone kind of investment.
Fees can vary widely in 401(k)s and some of them are hidden from view for good reason. It is one thing to be charged fees in a fund, it is wholly another matter to charge them for managing the plan. So many plan sponsors are finding funds for their participants that charge lower fees but at the cost of returns.
But wait, index funds are created equal. After all, there is the index they must follow. Not quite follow. Only about 75% of the stocks in the index are actually held in a S&P 500 index fund, and a third of the available companies are in a fund that tracks the Russell 2000. That leaves room for besting the index. And some do, particularly in the small-cap space where index funds can beat the index by eight to ten percentage points and do it with fees that are the same as some popular S&P 500 funds.
And fees in those funds can be all over the map. Why? Perhaps tracking error as they trade and research more than a similar fund. Perhaps because your index fund may be wishing it were an actively traded one. Reasons vary and so do the fees.
As Good As They Are
Index funds, as good as they are, should be kept outside of tax deferred retirement plans. This will allow you to control the fees and potential returns/risk those funds are taking much better. And in the current tax environment, it might well be worth paying for them now. Consider the three years worth of losses you would have been able to write-off after the downturn.
In 2010, tax rates will change for dividends (to that of ordinary income rates) and capital gains (to 20%) which is still a good deal - at least for the next couple of years. Dividend payouts are down and not likely to begin to increase soon making that tax reasonable. Twenty percent is not 15% but still not a bad deal.
(I realize that this sounds as if I'm advocating for the more expensive actively managed funds in 401(k)s. I am although I am just looking at it from a time frame point of view. Without a doubt, early investing is best. But many folks have entered the fray of 401(k) management with less than fifteen years until they would like to retire. Even if this group maxed out their contributions, it would take a solid 8% return year over year to get even close to enough to draw $15,000 a annually from the account and not run out of money. Risk inside a tax deferred account. Less risk outside. Your 401(k) plan unfortunately is your "mad money account"!)
Some Confusion Remains
People still confuse savings with investing too often and that, I believe, is one of the real problems with how folks recently readjusted their retirement accounts. Savings is not investing. As a result of this misdirected thinking about what those accounts really were, they have assumed so little risk, they put their "planning for retirement" at too long term a pace.
Retirement planning has become a very new and tricky landscape. People switched, sold or borrowed from their 401(k)s at the exact time they should have been rebuilding them. Had they stayed put and if they were fortunate enough to be able to continue their contributions, the vast majority of them would have seen balances in those accounts close to what they were at the 2007 year-end. What scares me now, is that there are new products on the shelf to add even less risk (at least in the sales pitch of loss) that investor/consumers might find attractive.
The Next Disaster
Disaster planning, which may comes as a shock to almost no one, can effectively derail any well-laid out plan. Kids, parents, jobs and a host of other problems can make deciding which move is best to for you doubly hard as you try to construct their plan.
Building a retirement that is financially predictable, growing savings that is stable and accessible and using your 401(k) plans to guide your future is no easy task. You will be assailed in the coming months and years with products that promise to protect your gains with products that are essentially insurance. Compared to index funds, these are like the neighbor who gives you a toothbrush. Good idea but the wrong treat
Retirement planning needs to be earthquake proof. That means considering new and innovative ways to get the 50 year old investor back in position to retire while s/he can. Less risk is not the path.
Paul Petillo is the Managing Editor of BlueCollarDollar.com and a fellow Boomer.
Further reading on index funds in your 401(k)
Showing posts with label management fees. Show all posts
Showing posts with label management fees. Show all posts
Monday, October 26, 2009
Thursday, October 15, 2009
Shining a Light on Your 401(k)
It Should be Easier
There are numerous obstacles that keep us from building enough wealth in our 401(k) plans. The first is as simple as beginning to invest in your retirement future. This is stressed frequently and with good reason. The earlier you begin investing, the better situated you will be for retirement in the far-off future.
The second hurdle is how much to invest. I suggests that no matter how poorly a plan you have with your employer, setting at least 5% of your pre-tax income (a number that does not have much of an impact on your take-home pay) is better than not investing at all. For first time 401(k) investors, who may need as much of their paycheck as possible, this is a good start.
The third hurdle is the company match. This is used as an incentive to get you to put some money away for your future by offering to match the first couple of percentage points. Some companies do not do right by their employees when they match only with their own company's stock or if they have lowered or withdrawn the match due to the "economic downturn".
And the last hurdle to these beginners is where to put their money. Not all plans are created equal and not all investments in these plans are worthwhile. That doesn't mean you should ignore the opportunity to invest, it simply means that your choices are not as good as they could be. This is particularly troubling if you are an older investor who may have gotten a late start or if you have changed jobs and are now enrolled in a less than adequate plan.
The Role of the Investor
Often, 401(k) users simply sit back and allow these companies to make difficult choices without their input. There is a fiduciary responsibility that is assumed by your employer when they offer you a plan like this to provide not only viable investments but opportunities to grow your money.
Becoming more vocal, even if you are the lone voice in the crowd used to be difficult. Access to necessary information was largely outside your abilities and most of the information was held close to the vest by the employer. Since January 2009, that has changed.
BrightScope, the brain child of two investment managers and a former engineer at HP, allows you to look at your company's plan in a way that was not possible previously. Designed to help human resource departments make good choices about plans, BrightScope seeks to give these folks some sort of benchmark to judge how their plan is run and how their employees access it and use it. BrightScope realized that "because benefits data has been controlled by a small group of companies that are not incentivized or governed by the same fiduciary standards that a plan sponsor must honor" difficulties in determining which is the best plan to offer their employees was not possible.
This concept understands that transparency is not what it should be and even though regulation to improve these plans may be forthcoming, waiting to id not a better choice. BrightScope it should be noted works with these HR departments and those with the fiduciary responsibility to improve those plans now.
How does it Work?
The software it employs, according to the website, works like this:
"BrightScope obtains some of its data from public sources such as the Department of Labor, the Securities and Exchange Commission, the U.S. Census Bureau, the Equal Employment Opportunity Commission, and the Bureau of Labor Statistics. Mutual fund asset allocation and fee data are obtained from mutual fund prospectuses, statements of additional information (SAI) and Form N-SAR. Mutual fund return history data is obtained from Xignite, Inc. Data on 401k fees comes from company filings, and directly from plan sponsors who work with us to improve their plan. While all participant-level data is protected and confidential, we aggregate data across comparable companies to construct relevant benchmarks for fees, plan design and plan performance. BrightScope believes it possesses the most comprehensive database of 401k information in the country. The company leverages this database to provide plan sponsors, advisers and participants with accurate and high quality data to help them make more informed decisions."
It also realizes that the cost passed on to you in the form of fees is not readily available to you and therefore must be garnered from the overall return of the investment. This is also up for regulatory change.
The company also makes some assumptions when it applies its magic to your plan. It grabs an average employee, someone who is a "44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000". From there, it acknowledges that each plan offers different company contributions, its own set of fees (generated by the large variety of plan sponsors, banks, mutual fund families , insurance companies, etc.), what is offered in the plan and whether the investment menu quality is adequate enough to provide growth opportunities, and how soon the employee may begin to use the plan (vesting schedules). These are, to say the least, unique to each company.
After determining what the company calls the "retirement goal line", a calculation that uses actuarial tables and assumptions of how long it will take the employee to get to retirement, BrightScope then runs a simulation, thousands of them. The better the plan, the quicker the plan participant gets to retirement, the higher the rating the plan gets on a scale of 1-100.
A Step in the Right Direction
It is no easy job being a plan fiduciary. BrightScope offers some much needed assistance with the task. Understanding that the responsibilities are many, including the need to act solely in the interest of plan participants and their beneficiaries, focusing their efforts towards the "exclusive purpose of providing benefits to them" is not as easy as it sounds. Not all companies have the personnel to achieve this sort of understanding.
Many times, the task of due prudence when overseeing these plans. the ability to follow all of the documents associated with the plan, being able to determine whether the underlying investments in the plan are diversified enough and cost effective (remember the fees are net of returns), is not always within the purview of the department responsible.
While you do have the right to request all of this information yourself and you can challenge the plan as being inadequate for your needs, BrightScope makes it easier to illustrate the problem. many companies believe they have done right for their employees. They may not know otherwise.
Check out your plan here.
Paul Petillo is the Managing Editor of BlueCollarDollar.com and a concerned Boomer.
There are numerous obstacles that keep us from building enough wealth in our 401(k) plans. The first is as simple as beginning to invest in your retirement future. This is stressed frequently and with good reason. The earlier you begin investing, the better situated you will be for retirement in the far-off future.
The second hurdle is how much to invest. I suggests that no matter how poorly a plan you have with your employer, setting at least 5% of your pre-tax income (a number that does not have much of an impact on your take-home pay) is better than not investing at all. For first time 401(k) investors, who may need as much of their paycheck as possible, this is a good start.
The third hurdle is the company match. This is used as an incentive to get you to put some money away for your future by offering to match the first couple of percentage points. Some companies do not do right by their employees when they match only with their own company's stock or if they have lowered or withdrawn the match due to the "economic downturn".
And the last hurdle to these beginners is where to put their money. Not all plans are created equal and not all investments in these plans are worthwhile. That doesn't mean you should ignore the opportunity to invest, it simply means that your choices are not as good as they could be. This is particularly troubling if you are an older investor who may have gotten a late start or if you have changed jobs and are now enrolled in a less than adequate plan.
The Role of the Investor
Often, 401(k) users simply sit back and allow these companies to make difficult choices without their input. There is a fiduciary responsibility that is assumed by your employer when they offer you a plan like this to provide not only viable investments but opportunities to grow your money.
Becoming more vocal, even if you are the lone voice in the crowd used to be difficult. Access to necessary information was largely outside your abilities and most of the information was held close to the vest by the employer. Since January 2009, that has changed.
BrightScope, the brain child of two investment managers and a former engineer at HP, allows you to look at your company's plan in a way that was not possible previously. Designed to help human resource departments make good choices about plans, BrightScope seeks to give these folks some sort of benchmark to judge how their plan is run and how their employees access it and use it. BrightScope realized that "because benefits data has been controlled by a small group of companies that are not incentivized or governed by the same fiduciary standards that a plan sponsor must honor" difficulties in determining which is the best plan to offer their employees was not possible.
This concept understands that transparency is not what it should be and even though regulation to improve these plans may be forthcoming, waiting to id not a better choice. BrightScope it should be noted works with these HR departments and those with the fiduciary responsibility to improve those plans now.
How does it Work?
The software it employs, according to the website, works like this:
"BrightScope obtains some of its data from public sources such as the Department of Labor, the Securities and Exchange Commission, the U.S. Census Bureau, the Equal Employment Opportunity Commission, and the Bureau of Labor Statistics. Mutual fund asset allocation and fee data are obtained from mutual fund prospectuses, statements of additional information (SAI) and Form N-SAR. Mutual fund return history data is obtained from Xignite, Inc. Data on 401k fees comes from company filings, and directly from plan sponsors who work with us to improve their plan. While all participant-level data is protected and confidential, we aggregate data across comparable companies to construct relevant benchmarks for fees, plan design and plan performance. BrightScope believes it possesses the most comprehensive database of 401k information in the country. The company leverages this database to provide plan sponsors, advisers and participants with accurate and high quality data to help them make more informed decisions."
It also realizes that the cost passed on to you in the form of fees is not readily available to you and therefore must be garnered from the overall return of the investment. This is also up for regulatory change.
The company also makes some assumptions when it applies its magic to your plan. It grabs an average employee, someone who is a "44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000". From there, it acknowledges that each plan offers different company contributions, its own set of fees (generated by the large variety of plan sponsors, banks, mutual fund families , insurance companies, etc.), what is offered in the plan and whether the investment menu quality is adequate enough to provide growth opportunities, and how soon the employee may begin to use the plan (vesting schedules). These are, to say the least, unique to each company.
After determining what the company calls the "retirement goal line", a calculation that uses actuarial tables and assumptions of how long it will take the employee to get to retirement, BrightScope then runs a simulation, thousands of them. The better the plan, the quicker the plan participant gets to retirement, the higher the rating the plan gets on a scale of 1-100.
A Step in the Right Direction
It is no easy job being a plan fiduciary. BrightScope offers some much needed assistance with the task. Understanding that the responsibilities are many, including the need to act solely in the interest of plan participants and their beneficiaries, focusing their efforts towards the "exclusive purpose of providing benefits to them" is not as easy as it sounds. Not all companies have the personnel to achieve this sort of understanding.
Many times, the task of due prudence when overseeing these plans. the ability to follow all of the documents associated with the plan, being able to determine whether the underlying investments in the plan are diversified enough and cost effective (remember the fees are net of returns), is not always within the purview of the department responsible.
While you do have the right to request all of this information yourself and you can challenge the plan as being inadequate for your needs, BrightScope makes it easier to illustrate the problem. many companies believe they have done right for their employees. They may not know otherwise.
Check out your plan here.
Paul Petillo is the Managing Editor of BlueCollarDollar.com and a concerned Boomer.
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