Response to Time Magazine article Cover Story Saturday, Nov 7 2009

I recently posted an excerpt from the Time magazine article cover story suggesting that American’s main retirement vehicle should be “retired.”  Here is a good response to that article.

 

Tips to Make Your 401(k) Work For You

Friday, 06 November 2009 11:06

by Christopher Davis – Provided by: Morningstar.com It’s surprising there aren’t many calls in the press to ditch the automobile. After all, think of all the dumb things people do with them. They drive much too quickly and sometimes after drinking lots of alcohol. They even drive while sending text messages, putting on makeup, and reading the newspaper. The consequences can be dire: More than 40,000 Americans die in auto-related deaths each year, with nearly 3 million suffering injuries of some kind. Of course, it would be impractical and silly to outlaw the automobile. They are too intertwined in our lives and are beneficial in many ways. And it would be unfair to blame the automobile for its misuse. Yet that’s exactly what’s happened in the case of another vehicle, in this case, the main retirement savings vehicle for most Americans: the 401(k). A recent Time cover story called for the retirement of the 401(k) itself, using the often-catastrophic losses investors suffered in the 2008 crash as the argument against them. But just as cars don’t cause accidents, there’s nothing inherent in a 401(k) that dooms you to a substandard retirement. The Time article was trying to make a broader point that the do-it-yourself nature of the 401(k) makes retirement savers much more vulnerable to unpredictable fluctuations in the market, especially versus the company-provided pensions of yore. Although pensions aren’t perfectly secure either, it’s true that even investors with thoughtfully conceived 401(k) portfolios suffered heavy beatings in 2008. Those nearing or in retirement were dealt an especially tough blow as they faced living off a much-smaller nest egg and because, unlike younger investors, they don’t have as much time to recoup their losses. (If you find yourself in this unfortunate spot, click here for some advice on how to cope.) Regardless of its shortcomings, though, the 401(k) is probably here to stay. And contrary to the impression provided by the Time article, using one successfully isn’t a lost cause. Here are a few tips on how you can make your retirement plan work for you. Save More The Time article does make one claim few can dispute: Americans don’t save enough for retirement. And, of course, it doesn’t help that over the past decade, stocks have gone nowhere, just like most investors’ 401(k) balances. Fortunately, there are some good reasons to believe that the next decade for stocks may be better than the last (long periods of subpar returns historically have been followed by long periods of above-average ones), which will give 401(k) accounts a boost. But you can’t rely on the market to do all your heavy lifting. If stocks and bonds don’t provide the return you need, you’ll have to fill in the gap by saving more. Of course, saving more can be easier said than done, especially now, with so many households strained by high debt, stagnant incomes, and unemployment. If it’s not possible to change your savings patterns dramatically right away, start small. You can pledge to increase your savings rate by a percentage point (or more) every year, for instance. If your 401(k) plan has an option that automatically increases your savings rate on an annual basis, take it. The easier you make it to stay disciplined, the more likely you’ll achieve your goals.   Originally posted at: www.learningmarkets.com

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Time Magazine Cover Validates My Blog’s Raison d’Etre Wednesday, Oct 21 2009

Time Magazine Cover Validates My Blog’s Raison d’Etre – interesting excerpt below.

From Oct 19, 2009 Time Magazine

Rebalance your portfolio. Most people don’t look at their [401(k)] statements when the market is going south — much less do anything about shifting their asset mix. Look at what you own — now! If you went into the downturn with 60% stocks and 40% bonds and have done nothing, your mix is now about 50-50. You have cut your exposure to stocks just as they have become more likely to rise. How important is it to get back to 60-40 (or any other target mix that has been skewed by volatile markets)? A starting balance of $100,000 that was 60% stocks and 40% bonds in 1970 and was never rebalanced would have grown to $2.9 million by 2008. That same portfolio rebalanced annually would have grown to $3.5 million, according to the Schwab Center for Financial Research. Keep at least 25% of your stock allocation in foreign companies to hedge against a weak dollar and a lagging U.S. economy. Limit your Treasury securities to 10% of your bond holdings to hedge against a widely anticipated surge in government borrowing rates.

I don’t entirely agree with all of the above.   My focus is stock picking, because when you compare how much stocks can move with the return of bonds there is such a huge difference.  This blog was started in the midst of an uptrending market (after it had already moved a lot), and yet stocks like GMCR and FCX went up 20% in 5 and 6 weeks respectively.   HL was up over 30% in less than 2 weeks and is maintaining those gains.   When you annualize those gains, it is truly mind-boggling.  It should be an interesting ride!  Come aboard!

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Madness & Delusions (Madoff & Delilah) Tuesday, Sep 8 2009

It has now been exactly 9 months since news was broken of the Bernie Madoff scandal.  This is my post at MarketWatch, in reply to a story that you can view using this link.

Brings to mind:  Extraordinary Popular Delusions and the Madness of Crowds, by Charles Mackay, 1841.  I think the Madoff debacle was in large part a financial mania, a bubble.  Like alchemists in ages past, Bernie seems to have actually believed his own “carp” for a while.  Certainly, so many self-satisfied souls believed in him without question.  In terms of sheer madness were the deluded retirees or those nearing retirement putting 100% of their capital, and by implication, 100% of their trust in one man.  Even putting 50% with him would have saved them from complete and utter destitution.  And apart from all that, the following salient paragraph stands out from the FUNDWATCH article:

“One of the fundamental rules of investing is to make sure the person managing your assets is not the same person with custody of them,” Bullard added, referring to the unorthodox administrative arrangement that Madoff had with his clients.

Quotes from Mackay’s book that help put Bernie in perspective:

“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

“Of all the offspring of Time, Error is the most ancient, and is so old and familiar an acquaintance, that Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome.”

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Obama helps with retirement planning… Sunday, Sep 6 2009

President Obama announced an effort [on Sept. 5, 2009] to encourage increased retirement savings by American workers, hoping to counter the losses suffered during the economic crisis of the last year.

“This recession has not only led to the loss of jobs, but also the loss of savings,” Mr. Obama said in his weekly video and radio address, noting that Americans have lost about $2 trillion from their retirement accounts because of the economic downturn.

The president, one day after the Labor Department announced unemployment reached 9.7 percent, said “the economy is turning around” but that the U.S. cannot, after its recovery, “go back to an economy based on inflated profits and maxed-out credit cards.”

He said he was proposing “several common-sense changes that will help families put away money for the future.”

The administration plans to make it easier for small businesses to automatically enroll employees into 401(k) programs, a feature that has been shown to benefit younger workers in particular, according to studies by Fidelity Investments. That means instead of making 401(k) plans a benefit that a worker must opt into, small businesses can enroll employees into accounts at the date of hiring unless the worker opts out.

The Internal Revenue Service will change tax forms to allow refunds to be automatically deposited into retirement accounts, and the administration also said it will change rules that forbid most workers from putting pay for unused sick and vacation days into their retirement.

Mr. Obama said the government also will simplify the written rules that govern how workers changing jobs can manage their retirement accounts and 401(k) plans.

(From the Washington Times, 9/5/09)

Difficult to recoup the losses from the market downturn devastation, but definitely a good idea, imo, to start young people off with a “retirement plan” when they are least likely to ever do any planning for retirement, but when it can do them the most good.  Have you seen the number comparing a teenager putting away just $4,000 and investing it does more good than an adult putting away $2,000 every year and investing it (with the same presumed returns) until they are 65?

More interesting detail below from the Voice of America that the Washington Times article did not mention.

He said the government will also make it easier for people to save their federal tax refunds, with an option for depositing the money into their retirement accounts. Those without retirement plans can check a box on their tax returns to get their refunds as a savings bond.

Another new option will allow workers leaving a job to put payments for unused vacation and sick days into their retirement plan.

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Lowered contribution limits Sunday, Sep 6 2009

Deflation could wallop your 401(k) plans

12:00 AM CDT on Saturday, August 29, 2009

By PAMELA YIP / The Dallas Morning News

Workers trying to rebuild their recession-battered 401(k) plans may have another obstacle next year: deflation.

A decline in consumer prices this quarter – i.e., deflation – could result in 401(k) contribution limits being lowered next year for the first time since Congress imposed the limits in 1986.

That would be bad news for workers who depend on their 401(k) plans for retirement and who max out their annual contributions to build their nest eggs and reduce their tax liability.

Contribution limits for 401(k) plans are adjusted annually, based on a complicated formula tied to the Consumer Price Index for the preceding third quarter. Thus, this quarter’s CPI will be used to calculate the 2010 contribution limits.

But the CPI was flat in July and, depending on how it performs in August and September, there’s a chance the formula could produce lower contribution limits for 2010.

It would then be up to the Internal Revenue Service to decide whether to keep contribution limits at 2009 levels or to lower them. A decision is due Oct. 15.

“This is the first time there’s been the potential for a decrease because of the cost of living going down,” said Pierce Noble, a partner and senior retirement consultant in Dallas for Mercer LLC, a global human resources consulting firm.

The amount of decline from the market would have had much more impact on the average 401(k) than worrying about a slightly lowered contribution limit from this year to next.  You can contribute to an individual retirement account (IRA)  once you hit your 401(k) limit.

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401(k) versus the ESOPs Sunday, Sep 6 2009

5 Tips to Maximize Your 401(k) Match

U.S. News & World Report.  August 28, 2009 05:15 PM ET | Emily Brandon | Permanent Link

The median Vanguard 401(k) account balance fell by 14 percent among continuous participants between 2007 and 2008. Ongoing contributions and maximizing your 401(k) match are the best way to recoup those losses. But all 401(k) matches aren’t created equal. Vanguard administered 401(k) plans with more than 200 different match formulas in 2008, according to a recent analysis of 2,200 Vanguard retirement accounts with over 3 million participants. Here’s how to make the most of your employer’s 401(k) match.

Sign up on time. Only about half (53 percent) of Vanguard 401(k) plans allow employees to contribute to the 401(k) plan immediately after beginning their job. In the rest of the retirement plans workers have to wait one to three months (24 percent), 4 to 6 months (8 percent), or 1 year (15 percent) to participate. Even more companies impose a waiting period before employees qualify for the 401(k) match. While 41 percent of Vanguard 401(k) plans match employee 401(k) contributions immediately, 29 percent of companies don’t match contributions until a year of service is completed and 30 percent require a 1 to 6 month delay. Learn the rules of your plan to make sure you sign up in time to bank the match you’re entitled to.

Contribute enough. Employees in most plans (47 percent) need to contribute 6 percent of pay to receive the maximum employer contribution. Other 401(k) plans ask workers to save 5 percent of their salary (18 percent), 4 percent (12 percent), or 3 percent or less of pay (10 percent). Just 13 percent of plans required the employee to save 7 or more percent of their salary to get the entire match offered.

Figure out the formula. The most popular match, used by three quarters of companies, is 50 cents for each dollar the employee saves up to 6 percent of pay. A slightly less common match, used by 16 percent of plans, is a multitiered formula, such as an employer contribution of $1 for each dollar the worker saves for the first 3 percent of pay and 50 cents per dollar for the next 2 percent of pay. Some 401(k) providers also varied their match formulas based on age or job tenure. About 7 percent of plans had a maximum cap on the employer contribution, such as $2,000. Only 6 percent of plans made no employer contributions of any kind in 2008.

Get other employer contributions. Some companies make profit-sharing contributions to 401(k)s regardless of how much the employee saves. Three quarters of employers making discretionary contributions varied the amount by age or tenure, making a median contribution of 4 percent of pay. If your employer offers a profit-sharing plan, find out what the eligibility restrictions are and what you need to do to participate.

Access the total value. At the end of the year, of course, what matters is the total value of the money in your 401(k). Most 401(k) matches ranged from 1 to 6 percent of the employee’s salary, with a median value of 3 percent of total pay. If you earn $50,000 a year and maximize a 3 percent match, that’s an extra $1,500 to pad your nest egg.

• Some really excellent stats to help you rank your own 401(k), to see if you’re getting shafted compared to what other companies are doing.  It is interesting comparing the 401(k) to the ESOP (Employee Stock Ownership Plan).  This will typically be structured in a private company.  There are no stingy match formulas to monkey around with.  The contributions are made for you, often equating to 20+ percent of your salary, and typically with a 6 year vesting period.  Such companies tend to be very successful, and don’t need to go public to raise capital.

• Remember, over-investment in company stock such as Enron and WorldComm (WorldCon!) were 401(k) plans (they could not be ESOP’s, because they were public companies).  Cargill is a private U.S. agricultural commodities company that does not need public financing and yet is bigger than about 98% of all Fortune 500 companies.  Cargill is in 67 countries, and yet remains a family owned business.  Being “under-diversified” in a good business can be a good thing!  Public companies are under more presure to perform no matter what the business cycle, hence they are more prone to fraud, cooking the books, or accounting irregularities.  Creative accounting is bad enough!

http://www.ebri.org/  (Employee Benefit Research Institute) – for more information on similar research, alluded to above.

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News you can use, 2 Sunday, Aug 23 2009

What happens to your 401(k) account if you lose your job?

Any IRA custodian you contact will help you with the paperwork and the transfer. Consider contacting a discount brokerage or mutual fund company, because these tend to charge lower fees than banks and full-service brokerages. Some companies to check out include Vanguard Group, Fidelity Investments and T. Rowe Price.

By Liz Pulliam Weston Money Talk, LA Times, August 23, 2009

Converting to Roth IRA opens options

Q:  Can I transfer my 401(k) directly to a Roth IRA, or does it have to go to a rollover IRA first?A:  If a 401(k) plan allows, you can transfer the plan directly to a Roth IRA. Beginning in tax year 2010, 401(k) plans will be required to allow transfers directly to a Roth IRA.  In 2009, you will still need to meet the income requirements to convert a 401(k), traditional IRA or rollover IRA to a Roth IRA. Your modified adjusted gross income, or MAGI, must be $100,000 or less.  You will owe federal and state income taxes on any converted amounts, but the amount converted is ignored when determining your eligibility to convert. Under current tax law, the MAGI income limitation is no longer applicable beginning in 2010.

If you anticipate having the same or greater income in 2011 and 2012 and tax rates increase, the ability to defer taxes on conversions made in 2010 loses its appeal. Another is the five-year waiting period for tax-free withdrawals from Roth IRAs after age 591/2. The five-year clock begins Jan.1 of the year a Roth IRA is established. Even if a conversion is completed on Dec.31, 2009, the five-year requirement is determined from Jan.1, 2009. If the owner is at least age 59 1/2, tax-free withdrawals will be allowed beginning Jan.1, 2014.

BY HOLLY NICHOLSON – Correspondent, Raleigh News & Observer

This was actually the whole premise of this whole blog initially.  Taking control of your retirement fund – either using market timing and wise mutual fund picks so your account doesn’t keep getting decimated (financial markets are a bloody roller-coaster), or converting your 401(k) to a Roth IRA.  Don’t get sucker punched again!  Get a clue, be wise.

A lack of knowledge about finances could make planning for retirement much harder work for young adults.

Almost half — 47 percent — of Americans born between 1977 and 1994, also known as Generation Y, are below average when it comes to financial literacy, with little unde

rstanding of how to budget and save efficiently, according to a survey by the National Foundation for Credit Counseling.

The survey, which polled 1,000 adults in March, also found that 45 percent of Generation Y adults have no savings.

Retirement savings are of particular concern for younger Americans because under current actuarial assumptions the Social Security trust fund will be exhausted in 2039, the year the first of Gen Y will turn 62, and benefits could be threatened unless changes are made.

Social Security Administration officials and financial planners continue to emphasize the importance of individual savings, retirement plans — 401(k) accounts and individual retirement accounts — and Social Security benefits for post-work income, what the SSA calls a “three legged stool.”

By Christina Burton, MarketWatch
Sunday, August 23, 2009

Those who have the most power to leverage their savings care the least about doing it, and are often completely oblivious about it’s merits.

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News you can use Sunday, Aug 23 2009

In the current economic turmoil, with investment portfolios melting in value, it’s become harder than ever to plan for retirement. Many people lack good investment advisers, or the time and skill to do their own investment research.

So a small San Francisco company, Cake Financial, has introduced a $99-a-year automated service that attempts to tailor a mutual-fund portfolio that will get you to retirement according to your goals. It’s designed to be simple, clear and relatively quick, using plain English, easy-to-understand graphics, and a step-by-step approach that walks you through the process. In essence, it’s a robotic, low-cost investment adviser.

Walter Mossberg, The Wall Street Journal

Well, you can get that advise here, for free.  Also, you can get market timing advise which Cake Financial will not give you.  Ron Insana of CNBC fame, and who runs a portfolio at TheStreet.com went to cash a couple of weeks ago.  The bulls are dancing on his grave right now.  There was no such rash panic from Maximus in this blog, and just as well…the equities market broke out huge.

Smart guy - lousy market timer!

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News & Comments Sunday, Aug 16 2009

Some hope for workers who’ve suffered pay cuts or reductions in their company’s contribution to 401(k) retirement plans in this brutal recession: A growing number of employers say they’re planning to undo that damage in the next six months.

http://latimesblogs.latimes.com/money_co/2009/08/some-hope-for-workers-whove-suffered-pay-cuts-or-reductions-in-their-companys-contribution-to-401k-retirement-plans.html

• Adding insult to injury:  huge market correction wipes out retirement plans, then corporate contributions dry up.

Recently a group of employees sued in Kansas over what they referred to as “secret fees” with regard to their 401(k). At the same time, legislation is slowly but steadily making its way through committee in the House that will force greater transparency on how information is shared with 401(k) participants. This is in reaction to quite a few obvious concerns over the recent economic meltdown and the impact on retirement plans. But many of those people who are reluctant to open their 401(k) statements in the first place, still have no idea how much of that money was lost to the market, and how much constituted fees and charges.   http://pitch.pe/21863

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News & Comments Sunday, Aug 16 2009

• Momentum is building in Congress to require expanded 401(k) disclosures that could be of particular benefit to small-business owners and their employees.
• More transparency would especially help small companies because the fee rates they pay tend to be higher than those of big employers. A survey of 130 401(k) plans by Deloitte Consulting LLP late last year found that plans with fewer than 100 participants pay a total amount, including flat fees paid directly by the employer, averaging 2.03% of their plan assets in annual fees, compared with 0.89% of assets paid by plans with 100 to 999 participants. The largest 401(k) plans—those with 10,000 or more participants—pay only 0.49% of assets as fees.

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