Reuters Money

Your retirement rollover decision could save you thousands

In the two decades that I’ve been covering personal finance, I’ve worked for three big companies. I like to practice what I preach, like in the video above, where I explain some simple ways that you can manage your 401(k) when you change jobs and potentially save yourself more than $60,000 in about 30 minutes.

The backstory that you don’t catch above is this:

I’ve participated in the 401(k) at each employer I’ve worked at over the years, contributing the most money I could afford and always meeting the threshold to get the prized company match.

But on my way out the door, I’ve always taken my money with me, rolling over my hard-earned retirement funds into another qualified investment opportunity.

Workers have some choices when they leave a job. They typically can leave assets with the former employer, move it to an IRA or roll it into a 401(k) plan at their new job. (They also could cash it out – something I don’t recommend because of the tax penalties and it’s supposed to be there for retirement.)

When I left my last job, I rolled my retirement funds into the Thomson Reuters 401(k). There are a few reasons why: For one thing, I like the control you get when you move your money around. A previous employer offered weak investment choices, most of which were actively managed funds that lagged their peers.

Tempted to bail on stocks? Learn this lesson from 2008 data

Past performance is no guarantee of future results, as the saying goes. But a new Fidelity Investments analysis of what’s happened to retirement investors’ portfolios since the 2008-2009 market crash is worth considering if you’re tempted to pull money off the table during the market’s current volatility.

The big message: Investors who held on tight through the harrowing 2008-2009 crash have been richly rewarded since then.

Fidelity looked at the performance of 7.1 million 401(k) accounts, comparing returns for investors who made changes to their portfolios during the 2008-2009 market crash up through June 30th this year — a point when the market was on an upswing preceding the steep drops and volatility that began in late July.

The key findings:

• Participants who changed their equity allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and stayed out of stocks through June 30th this year saw an average increase in account balance of only 2 percent.
• Participants who exited stocks but then returned to some level of equity allocation after that market decline saw average account balance increases of 25 percent.
• Investors who stuck it out with a continuous asset allocation strategy that included stocks had an average account balance increase of 50 percent.

Fidelity also looked at participants who stopped contributing to their 401(k)s during the 2008-2009 crash; they experienced an average increase in their account balances of 26 percent through the end of the second quarter, compared with 64 percent for those who kept making regular contributions.

Only a very small percentage of Fidelity’s 401(k) investors withdrew entirely from the market. Less than one percent of account holders (0.8 percent) bailed on all their equity investments during the 2008-2009 crash and stayed out entirely, according to Beth McHugh, vice president of market insights at Fidelity. And among investors who had been actively contributing before the crash, only 1.4 percent stopped doing so as a result of the downturn.

Retirement investors suffer as economy catches up to Wall Street

Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.

On Main Street, the jobless rate tops 9 percent and 14 million residential mortgages are underwater – a figure Deutsche Bank thinks will hit 25 million, or 48 percent of all home loans, before the housing bust ends.

On Main Street, the economy hasn’t respond to ultra-accommodative monetary policy. Near-zero interest rates don’t matter because because there’s so little demand for credit to hire people or to buy post-bubble real estate.

Meanwhile, free money has been great for Wall Street. The companies that created Main Street’s problems through the reckless behavior that led to the financial crisis barely missed a beat, and they went right back onto the gravy train.

Now, the Jekyll and Hyde economies demand to be reconciled. The markets finally realize what Main Street has known all along: we’re stuck in a grinding, recessionary economy with no end in sight. You can’t even call what’s coming now a double-dip, because the first downturn never ended.

Monetary policy is of limited use. Interest rates already are at rock-bottom; we’ll probably see more easing soon, even though QE2 hasn’t helped much. Meanwhile, fiscal policy has been focused in exactly the wrong area — deficit reduction rather than job creation and direct stimulation of the economy.

Of course, most Americans have a stake in both the Jekyll and Hyde economies – we live on Main Street, but our retirement money is invested on Wall Street. So the obvious question: what now? I’ll be blogging about strategies for retirement investing all week, but here’s my opening comment to those of us living in the Mr. Hyde economy, don’t create a self-inflicted wound by selling out of panic during this plunge.

Stable value funds facing extinction, despite popularity (CORRECTED)

Who wouldn’t want to get a significantly higher yield than a plain-vanilla money market fund — but with limited risk? Most of us in 401(k)s and other tax-deferred savings plan will recognize the stable value fund option as the let-you-sleep-at-night investment.

That promise of a steady performance and protection against losses has made stable value funds one of the most popular choices in tax-deferred savings plans like 401(k)s. Indeed, on average, about 13 percent of all defined contribution (DC) assets, or $540 billion, are allocated to stable value funds and half of all DC plans offer this option, according to EBRI/ICI and the Stable Value Investment Association annual 2010 survey, respectively.

These funds are pools of diversified bond portfolios combined with insurance or bank contracts called wrappers. The wrappers help to prevent prices from fluctuating with the underlying bonds. What you essentially get is the price stability of a money market fund and the higher yield of a bond fund.

But you may not be seeing these funds on your menu of 401(k) investment options in the near future. A Pacific Investment Management Company (PIMCO) study of pension consultants serving defined contribution plans reported earlier this year that half of those surveyed expect clients to reduce their reliance on stable value options over the next several years.

For one thing, the stable value fund rate of return fell from 4.05 percent at year-end 2008 to 3.25 percent as of December 31, 2010.

“About 15 to 20 percent of clients are well along in the process of existing, re-evaluating or putting a stable value review high on their radar screen,” says Kristi Mitchem, head of global contribution and senior managing director at State Street Global Advisors.

Here are Mitchem’s answers to the other key reasons why these funds are falling out of favor:

Gen”Why?”: Balancing your finances with boomerang kids

Fred Amrein has three children in their early 20s: the youngest lives in college dorms, the middle lives at home and the oldest — soon to be married — recently moved out.

The “boomerang generation”– young adults who live at home with their parents — are increasingly turning to mom and dad for further financial support. But will caring for your adult children jeopardize your retirement security?

“We’ve managed by creating a timeline that says OK, we can postpone our retirement vision to make sure their lives start out on track,” Amrein says.

Although he feels the financial stresses many baby boomers face to support their children — from paying college fees to handling everyday expenses — Amrein is luckily able to balance financial obligation with fiscal prudence. He’s a financial adviser.

“I have a niche in college funding, so I do a lot of analysis work for parents that are going through this,” says Amrein, principal at Amrein Financial. “One of the things that I do is create a timeline to make sure that they understand when the last child will come out of school and how long they have to recover, so it’s their choice whether they want to lighten the burden on their children or (draft) their priorities from a financial goal standpoint.”

In a study released by TD Ameritrade, 41 percent of young adults admitted to relying on their parents for financial support after college, which could likely derail their parents’ retirement plans. Forty-two percent of baby boomers surveyed said taking their children back into the home had a negative impact on their finances.

“We’ve seen clients spending up to $20,000 a month on their children after they’ve finished college, and they come home and aren’t doing a whole lot,” says Alan Moore, financial planning analyst with Kahler Financial Group. ” It’s killing their parents financially, and we see this with clients more often than I’d like to admit.”

Schwab plan points toward a changing 401(k) market

Charles Schwab has long been a leader in low-cost retail investing. Now, it’s gearing up for a run at the 401(k) market by hitching its wagon to two ideas whose time may have come: low-cost passive investing and investment advice for plan participants.

Schwab has never been a major player in administering 401(k) plans for employers. The market is dominated by companies like Fidelity Investments, Vanguard and Aon Hewitt. But Schwab is preparing to roll out a new platform for 401(k) plans that it hopes will help it to crack the code.

The idea is to slash investment costs through exclusive use of passive investment vehicles – index funds and Exchange-Traded Funds (ETFs). Then, Schwab intends to plow some of the savings into investment advice for workplace retirement savers that would be built into the platform.

“In the old days of defined benefit pension plans, the outcome was managed for you by professionals,” says Jim McCool, executive vice president of institutional services at Schwab. “But in 401(k) plans, only about one out of 10 investors is getting professional help with investment decisions. We want nine out of 10 to get the benefit of a managed outcome, and take significant expense out at the same time.”

“Our conviction is that the two most incontrovertible features this industry needs to get its hands around are certainty of expense and the impact of advice,” he adds. “Putting those two together is a powerful combination.”

It’s not at all clear that Schwab can make a dent in the business, considering its lack of a track record in the 401(k) market. “Schwab was late to game, and they’ve had very little success cracking large company plans,” says Mike Alfred, CEO of Brightscope, which tracks 401(k) plan performance. “They have nothing to lose by trying this. Companies like Fidelity have a cash cow to protect with their 401(k) record-keeping businesses, and actively managed funds.”

Schwab intends to roll out the new platform in two phases. The first, targeted for launch in the first quarter next year, will be an offering of indexed mutual funds combined with managed accounts; later in the year, Schwab intends to launch a second offering combining advice with ETFs.

Should the U.S. Treasury sell annuities?

Here’s an out-there idea whose time has probably not come, at least not yet: What if, instead of (or in addition to) floating bonds, the federal government sold retirement annuities?

That may sound like a wild idea, especially in an era when policymakers are talking about privatizing Medicare. But it has advocates within the retirement industry. The upside, according to Martha Tejera, a veteran retirement plan consultant, is that retirees who bought annuities guaranteed by Uncle Sam would feel like their retirement funds were secure. They wouldn’t have to worry about managing their own nest egg, running out of money, or handing their funds over to a Madoff-style crook.

“I think we are creating a whole generation of retirees who are just going to be preyed upon, by both legitimate and non-legitimate sellers of financial products and advice,” she says.

I spoke to Tejera while I was researching today’s Stern Advice column about the changing debate surrounding 401(k) accounts. Instead of focusing on the ability of workers to build enough savings in those accounts, retirement industry experts like Tejera are starting to focus on what happens to that money when workers retire. Asking individuals who aren’t financial professionals to manage their nest egg for a lifetime might be asking a lot. “If you hand them $200,000 all at once, it can go poof! pretty quickly,” she says.

The government-as-annuity-seller idea was raised recently by a couple of well-known professors in a New York Times opinion piece. University of Texas Law School professor Henry T. C. Hu and University of California Berkeley finance professor Terrance Odean argued that having the federal government guarantee inflation-adjusted annuities would help people cope with the possibility of outliving their savings, and would also earn the Treasury some tidy deficit-reducing profits.

In their view, having the federal government guarantee annuities will reassure workers that the insurance companies selling them lifelong income streams will still be around when the money is needed. It will allow the insurance industry to create and manage the annuities, so it won”t wipe out that sector altogether”. It would reduce federal reliance on Chinese (and other foreign) bond buyers. “Our proposal is a winner for everyone,” they said.

Of course, a few questions remain. One that springs to mind is: Isn’t that what Social Security already is? Not exactly, as Social Security is not a self-funded and dedicated annuity, but a more broad-based pay-as-you-go retirement security program. The annuity plan could be invested by the insurance industry in instruments yielding more than the Treasury bonds that the Social Security program relies on.

Workers stashing money in 401(k) plans at record rates

Thanks to automatic enrollment and an improved stock market, employees are stashing money in employer-sponsored retirement plans at a record-high rate, according to a new Aon Hewitt study.

The consulting firm’s analysis of three million employees across 120 large companies shows that 75.8 percent of eligible employees participated in their company’s defined contribution plan — usually a 401(k) plan — in 2010. That’s the highest level since 2002, when the firm began tracking defined contribution plans, the company reported. In 2009, participation was 73.7 percent.

Other key findings:

* The average employee’s total plan balance was $76,020 at the end of 2010, while the median balance was $24,680. (Fidelity Investments, which is the nation’s largest administrator of retirement plans, recently reported that the average U.S. 401(k) retirement-savings account had a record $74,900 in assets as of March 31.)

* Nearly three in 10 plan participants contributed below the company match threshold, up slightly from 2009.

* Pretax contributions to defined contribution plans were unchanged from 2009 at 7.3 percent of pay, but still down slightly from pre-recession levels in 2007 (7.7 percent).

* Nearly one-third (29.4 percent) of plan participants contributed below the company match threshold, up slightly from 2009 (28.2 percent).

Most Americans find their retirement goals unattainable: study

If you’re feeling discouraged about reaching your ambitious retirement goals, rest assured you are not alone.

According to the newly-released study called Shedding Light on Retirement, 55 percent of Americans don’t know how to achieve their retirement goals.

The ING-sponsored study, which polled 2,630 retirement investors, also revealed that while Americans want to be in control of their money, they’re also overwhelmed because of lack of guidance.

In an interview with Reuters, Lynne Ford, CEO of ING Individual Retirement, pointed out some of the major take-home points from the survey.

Looking at the big picture, what exactly does this survey tell us?

A: It tells us a couple of things. We’ve seen for many years now that Americans are getting the fact that they are responsible and accountable for providing for their retirement. The two new things that come out of this survey are, first, just the overwhelming sense of confusion and anxiety people have about getting it done. They say, ‘We don’t have a roadmap, we don’t have a recipe,’ and there are so many moving parts (to investing) because people are saving at the work site and then they’re saving away from the work site.

The second thing that’s interesting about the survey is that it really points to a paradox. The American participant has conflicting desires: they want to be in total control of their money and they want to be empowered to do it their way, but then they’re also saying ‘We don’t have a roadmap and we don’t have the guidance.’ So this paradox around wanting control but needing advice is where we’re finding people today. I think it’s good news because it means people are moving down this path of accountability.

Pros beat the little guy in navigating 2008 bear market: survey

Step one: Take professional money managers responsible for the portfolios of large pension funds, and throw them into a vicious bear market.

Step two: Let them compete against individual retirement investors to achieve the best rate of return. Who are you going to bet on?

In the bear market of 2008, the smart money would have been on the professionals who manage the portfolios of defined benefit (DB) pension funds. Rates of return on DB plans that year beat the aggregated results of defined contribution (DC) plans — chiefly 401(k)s — by the widest margin since early in the last decade, according to a new study.

DB and DC plans both lost about one-fourth of their value in that year’s market meltdown, but DB plans outperformed 401(k) plans by nearly three percentage points, according to the study by Towers Watson, the employee benefits consulting firm.

DB plans had median investment returns of -23.44 percent in 2008, while DC plans had median returns of -26.12 percent. Earlier Towers Watson studies found that, over time, DB plans consistently outperform DC plans. The most recent comparable large margin in returns was during the last bear market (2000 – 2002), when DB plans outperformed DC plans by roughly 2.25 percentage points.

The findings reflect data from more than 2,000 plan sponsors, each of which had a single DB and DC plan.

Separate tracking by Towers Watson of 97 companies shows that DC plans outperformed DB plans in 2009. Both DB and DC plans rebounded strongly that year, with both types of plans experiencing positive returns. DC plans had median investment returns of 19.11 percent, slightly outpacing returns for DB plans (18.5 percent). This marked the first time since the dot-com era and the 1995 – 2000 bull market that DC plans outperformed DB plans.