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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.

Why 401(k) plans will fall short for most Americans

It’s time to end the fraudulent notion that 401(k)-type plans are adequate retirement vehicles for most Americans.

They fall short in so many ways, but mostly because they’re too expensive, are exposed to excessive unhedged market risk, poor allocation and contain no income guarantees. There is a better way: Congress can fix the problem while boosting private investment.

With the latest market rout, it’s hardly surprising that most Americans say they are “not where they need to be” on retirement saving. Most are behind after two recessions, two market crashes and yet another downturn.

While most 401(k) balances rose over the past two years, more employees than ever before have taken out loans against their major source of retirement funds. The ever-worsening economy has forced Americans to treat their 401(k) balances like piggy banks.

Should future retirees be consistent hostages to market conditions, praying that a rebound in stocks will help fill the gap?

Since there’s no guaranteed, inflation-adjusted annuity incorporated into 401(k)s — regular monthly payments that rise with the cost of living — it will be difficult for future retirees to attain a dignified lifestyle. They will also be fully taxed on all withdrawals for conventional 401(k)s (Roth accounts’ payments are generally tax-free), so the biggest tax hits may be yet to come.

The 401(k) doesn’t work on a large scale because it exposes nearly every participant to market risk that can’t be fully hedged.  No one can consistently predict market cycles and less than half of employers offer personal planning services that offer meaningful guidance to protect you from the pitfalls of market investing.

Deficit cutting will widen retirement gap for minorities

New research finds an appalling 20 to one chasm in net worth between white and black Americans, and an 18 to one gap between whites and Hispanics. The Pew Research Center found that the net worth gap has widened during the Great Recession, mainly because the housing bust disproportionately cut into the wealth of African-Americans and Hispanics.

The housing crash hurt these households disproportionately because they tended not to have much in the way of other assets, especially when it came to retirement savings. So, the Pew report — an analysis of the comprehensive U.S. Census Bureau Survey of Income and Program Participation for 2009 – points to a terribly important social problem we face today – and the growing retirement security gap confronting minority households.

This is worth keeping in mind as Washington’s debt ceiling and deficit reduction circus continues – and as the politicians and policymakers continue their flirtation with dangerous cuts to programs that will be absolutely critical to minority households in the years ahead, namely Social Security, Medicare and Medicaid.

These programs are very important to all Americans, of course. But they will be nothing short of a lifeline for households approaching retirement with little or no retirement savings, through no particular fault of their own. Traditional defined-benefit pensions have all but disappeared in the private sector, and voluntary saving through Individual Retirement Accounts or 401(k) plans are tied to several important factors where minority populations are at a disadvantage:

Income. You can’t save what you don’t earn. While there’s nothing new here, Pew reports the disparities in joblessness and income have continued during the Great Recession. Jobless rates at the end of 2009 stood at 12.6 percent for Hispanics, 15.6 percent for African-Americans and 8.0 percent for whites. Income losses also were greater for minority households.

Access. Minority workers are less likely to work for employers that offer a workplace retirement plan. Just 33 percent of Hispanic workers – and 49 percent of African-Americans – had access to a workplace plan in 2009, according to the Employee Benefit Research Institute. That compares with 53 percent of white workers.

Tax breaks. The tax breaks granted to 401(k) and IRA savers are available only to those who itemize and are greatest for most beneficial to high-income households. Taxpayers in the highest-earning quartile by income claim nearly 80 percent of the total benefits of entitlement programs for retirement accounts, and more than 40 percent goes to the top 6 percent of taxpayers alone, research shows.

5 ways a big deficit deal will whack your retirement

If Washington strikes a big deal on deficit reduction to avoid debt default, it’s going to be bad news all around for older Americans.

The debt crisis negotiations may yield no more than a short-term Band-aid and sidestep long-term changes in spending policy. But it’s clear that the Obama Administration and some lawmakers are reaching for a big deal patterned on ideas developed by politicians positioning themselves as bipartisan budget peacemakers.

So, while average Americans worry about the ongoing jobs crisis and vanishing retirement security, lawmakers and the President make plans for deficit reduction that will whack vulnerable older Americans.

Many of the spending cut ideas come from the final non-report of the President’s own deficit commission. (I call this a non-report because co-chairmen Alan Simpson and Erskine Bowles couldn’t muster the votes needed from commission members under their own rules to report out a final document, yet Washington accepts what the co-chairs issued as an official document). Other key ideas are embodied in the bipartisan plan du jour presented by the on-again, off-again Gang of Six.

Watch out for these possible blows to retirement security as the debt default deadline approaches:

A higher Social Security retirement age. Simpson and Bowles call for raising Social Security’s full and early retirement ages. Their changes would effectively reset the full retirement age to 68 by 2050 and 69 by 2075; the early retirement age would rise to 63 and 64 in those same years. That comes on the heels of the increases already made in the 1983 reforms, which moved full retirement age to 67 in 2022.

Simpson-Bowles and others have argued that higher retirement ages are justified by the population’s rising longevity, but it’s really just a back-door benefit cut for everyone, no matter when you file for benefits. That’s because your monthly benefit is determined by the normal retirement age (NRA) at the time you file; if you file before your NRA you’ll be penalized, and if you file later you get an eight percent bump in monthly payments.

Financial independence day: 5 ways to get there

No fireworks will explode if you can pull off financial independence, but it sure beats working for the man. How do you do it? Do you have to live like a monk? Give up chocolate? Move to a tent? Stop watching the Cartoon Network?

While it helps if you were an investment banker, CEO, professional athlete, movie star or inherited a ton of money, there are other ways to get there. Here are some favorite, little-heralded ways.

Debt is the Devil The biggest impediment to financial independence is unbridled debt. If you spend more than you make and get into debt, you’re working for the banks. That’s pretty standard advice, although most folks don’t know how to systematically avoid this trap. Like a demon, debt needs to be exorcised. First, get to the point where a bank is paying you to use credit. Use reward cards (they give you cash awards, airline miles or other dividends) and pay them off by their due date. Don’t carry over any balances. If you can’t pay for something when the bill comes due, don’t buy it. Don’t take out home-equity or installment loans. They are not worth it. I have nothing against carrying a mortgage balance — it’s always been called “good” debt. But the sooner you can pay it off, the better. The benefit of getting a tax deduction is overblown. A long-term debt impairs your freedom as much as a short-term one.

What can you live without? Unfortunately, most consumer societies are predicated on having it all now thanks to readily available credit. Save up to pay cash for the things you really want. Get rid of the things that provide marginal pleasure. Can you live without cable or satellite TV? Dump it and save the difference. How about that health-club membership? Did you know you could exercise at home for nothing (remember calisthenics)? Most libraries allow you to check out movies, music and books for free. Go without that morning cup of coffee or that daily lunch. Bank the savings. Make it your motto to “save first, spend later.” Fill up your short-term money market account with savings that can take care of emergencies and rainy days. Check your health, home or auto insurance. Make sure you have enough money to cover out-of-pocket expenses. As for life insurance, unless you have dependents who would be financially hurt if you pass, don’t buy it. Disability insurance is a good idea. You have a greater chance of being disabled than dying during your working career.

Save like a demon You’ve probably seen suggestions that saving 10 percent to 15 percent of your annual income will lead to a comfortable retirement. Forget it. On most retirement withdrawals — including annuity income — you’ll need more to pay Uncle Sam and then cover higher medical expenses in coming years. Start with a goal of saving one-third of your income. Open up a Roth IRA or 401(k). You pay taxes on the contributions, but not on the withdrawals. Use every opportunity you can to save with tax-deferred accounts. No amount is too small.  Don’t forget to save enough to cover taxes.

Small fees take big hits I’m a raging evangelist on this issue. Being nickel and dimed by brokerage fees, commissions and middlemen expenses eats up your wealth in a big way. Some 70 percent of employees don’t even know that their employer or 401(k) fund provider is charging them fees to invest in their retirement funds, according to an AARP survey. What looks like a small amount on your statements can eat up your kitty over time. And forget about brand names, advertising and the supposed prowess of fund managers. All that matters is cost and diversification. Let’s say you have the American Funds Growth Fund of America, a popular stock fund for retirement. Then compare it to the ultra-diversified, passive Vanguard Total Stock Market Index . While I can’t predict what future returns will be in either fund, if you invested $10,000 in each fund, earned a modest five-percent annual return, you’d have saved $1,152.97 in fees and sales charges (on the “A” shares in the American fund) in the Vanguard fund after a decade. This is not a patent endorsement of Vanguard, although I have most of my retirement funds invested with them. It’s basic math. Costs matter. The less you have to pay — whether it’s in fund fees, banking charges, commissions or interest — the better. Avoid any broker-sold product. Buy direct. Run your own numbers to compare funds with the FINRA Mutual Fund Cost Analyzer, which is what I used in the above example.  You can’t beat Wall Street. They beat you with the small stuff every day.

It’s not about numbers, it’s about your life I’m sick of self-serving surveys of how poorly people are saving for retirement. They are usually published by the same companies who want to gouge you to invest in their “retirement” products. Find out how much it would take for you to live comfortably and put away enough money to get there. Develop a dynamic lifetime financial plan that changes with each phase of life. Get a ballpark estimate to see if you’re on track. Financial independence is possible if you can live below your means. Although that sounds unpatriotic in a consumer economy, what you save is what you keep. You’ll have plenty of reasons to celebrate if you can reach that goal.

Retirement solvency “a growing challenge” says GAO

The risk that retirees will outlive their assets is a growing challenge, the federal Government Accountability Office said in a not-so-newsy report released on Friday. To meet that challenge, experts advise retirees to delay the start of their Social Security benefits, avoid spending down their nest eggs too fast and consider using annuities in some situations, says the study.

The report could be used to nudge forward policy initiatives already under consideration that would encourage companies to offer annuity choices to their retiring workers. The report was requested by Senator Herb Kohl, chairman of the Senate Special Committee on Aging. He has cosponsored a bill, called the Lifetime Income Disclosure Act, that would require 401(k) statements to include an annuity equivalent number — the amount of monthly income that the savings accumulated would support.

The Treasury Department has asked for public comment on the idea that employers, given some safe harbor against lawsuits, could encourage workers with 401(k) accounts to annuitize their savings. Mark Iwry, the Treasury Department official who has been looking at these retirement issues, commented in a letter to the GAO. “We will take the information and analysis in the report into account as we consider guidance to issue.”

To conduct the study, the GAO created sample retiree profiles at varying income levels, with and without defined benefit pension plans. It then asked a host of experts within the financial services industry, academia and a “retiree interest group” (I’m going to guess that it was AARP) how they would advise retirees with those profiles to protect their income for the long haul.

The experts generally recommended familiar strategies: (1) leave your money in your defined benefit plan and take an annuity instead of a lump sum; (2) make systematic (and not unreasonably high) regular withdrawals from your savings; (3) delay the start of your Social Security benefits; and (4) consider buying an income annuity to cover some basic expenses for the rest of life.

The GAO also surveyed retirees to see if they were following that advice and found, in general, that they were not. Roughly half of retirees take their Social Security benefits before their 63rd birthday, according to data cited in the report.

The experts surveyed by the GAO suggested that middle-net worth households that did not already have a defined benefit plan could gain the biggest advantage from buying income annuities, in which a sum of money buys a guaranteed lifetime monthly stream of income. “They should consider using a portion, such as half of their $191,000 in financial assets to purchase an inflation-adjusted annuity,” the report says, noting that it would provide an additional $355 per month until the death of the last surviving spouse, and grow in subsequent years with the Consumer Price Index.

Will Congress slash your 401(k) tax break?

Is Congress getting ready to slash the tax deduction on retirement saving?

The deductions on IRAs and 401(k) contributions is one of the deficit reduction options known in Washington as “tax expenditures” — that is, revenue the government foregoes through deductions, exclusions or exemptions. Overall tax expenditures — which also include deductions for big-ticket items such as mortgage interest and employer health plans – are worth more than $1 trillion a year.

The retirement saving deductions for pensions and defined contribution plans cost $143 billion in 2010, according to the federal Office of Management and Budget; some argue that the cost really is lower, since the deductions are deferrals of taxes that are paid down the road in retirement.

President Obama’s National Commission on Fiscal Responsibility and Reform recommended capping combined employee/employer pre-tax contributions to 401(k)s at $20,000 or 20 percent of income, whichever is lower. That would be a substantial cut in deductibility, since the employee deduction alone currently is capped at $16,500 (savers over age 50 can make additional $5,500 “catch-up” contributions).

The commission also recommended expanding the saver’s credit, which helps lower-income savers by allowing a credit of $1,000 for individual filers ($2,000 on joint returns) on a percentage of qualified contributions.

Meanwhile, the House Subcommittee on Health, Employment, Labor and Pensions heard testimony earlier this week on limiting the retirement deduction.

This might be Washington’s second most important retirement policy regulatory issue — coming right after the Department of Labor’s preparations to add fiduciary responsibility to workplace retirement plan platform providers. Yet the  odds look long for any immediate action on retirement savings deductibility. “Is it likely to be a big part of anything prior to the 2012 election? Probably not,” says Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI).

“War for talent” has employers ramping up employee benefits: survey

If there’s a silver lining to be had following the financial crisis that shook the global economy in 2008, it’s this: more employers are feeling increasingly responsible for the fate of their employees — and that’s translating to more comprehensive employee benefit plans, a new survey finds.

The downside? Nearly 60 percent of the employers polled say most of their employees fail to take advantage of the resources available to them.

“The disconnect we’re seeing today… is that despite the fact that employers are making financial education and advice programs available to employees, many employees do not engage in these programs because they do not find the information relevant enough to them personally,” says Andy Sieg, head of retirement services for Bank of America Merrill Lynch, which commissioned the survey.

Despite the fragile economic recovery and high jobless rate, the labor market is in a so-called “war for talent,” Sieg says. In fact, a recent report from the American Society for Training and Development found that by 2015, 60 percent of all new jobs will require skills held by only 20 percent of the population. Add in the fact that two out of three employees at big companies are looking for the exit sign, Deloitte reports, and there’s legitimate reason for employers to be jittery about losing top talent. As a result, workplaces are ramping up efforts to not only attract younger employees, but to retain older employees for a longer period of time.

Among the efforts underway:

• 50 percent of employers surveyed offer flexible or customized work schedules
• 33 percent are implementing retirement and healthcare education
• 22 percent are giving employees the chance to work remotely
• 21 percent are offering extended benefits to older workers

With Social Security worries plaguing Americans, employers are beginning to recognize the need for a workplace benefits program that goes beyond the standard auto-enrollment plan.

401(k) rip-offs: How to protect yourself

There may be larcenous gremlins in your 401(k) eating your retirement money. They aren’t easy to identify and are often buried in plan documents. You will need a trained professional to exterminate them.

Many of the biggest 401(k) money-eaters escape the notice of your employer, who is legally obligated to ferret them out. Your company may have bought 401(k) services from middlemen who suck up your money in the form of commissions, administrative or management fees.

How do you know if your money is being siphoned off? In many cases, you will never know, nor will your employer take the time to audit your plan to get rid of the worst abuses.

The U.S. Department of Labor is working on new rules that would make money managers connected to retirement plans fiduciaries. That would set a higher standard that would put your interests first.

The money trust is vigorously opposing these guidelines, which could potentially eliminate or curtail some of the worst skimming practices. Yet that may not have much impact if the Labor Department does little or no enforcement, which has been the case in the past.

“I believe that anybody who sells 401(k)s should be a fiduciary,” said Mark Mensack, chief ethics officer with Piedmont Independent Fiduciaries in Marlton, N.J., “because very few 401(k) plan sponsors that I’ve dealt with (primarily in the under $100 million market) understand their fiduciary responsibility.”

Extra expenses are often loaded into what you pay for fund management and administration within a 401(k). The difference between fees on one share class or another can add up to $100,000 a year in additional fees that are drained from a group plan, Mensack has found.

Are investors under 40 too risk averse?

Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier times?

Some are, and some are not.

As stock prices have gone through wide swings in recent memory — with the Standard & Poor’s 500 Index plunging 57 percent from its all-time high of October 9, 2007 to the low of March 9, 2009 and then bouncing back nearly 100 percent — it’s understandable that young investors would have varied reactions.

Their views of market risk have depended not only on how much money they can afford to invest but also on the ways they invest: as employees in 401(k) defined contribution (DC) plans, individuals invested in IRAs, people investing outside tax-deferred accounts, “non-working” spouses self-employed and so on.

What’s more, opinions also could have depended increasingly on relatively new DC plan factors whose significant features may not yet be widely understood.

The importance of greater understanding was brought out at the recent annual meeting of the Investment Company Institute, when ICI Chairman Edward C. Bernard gave special attention to investors under 40 as he recalled recent ICI investor surveys’ findings that “across a wide spectrum of ages, investors have a reduced appetite for risk.”

“What’s particularly striking,” the T. Rowe Price Group vice-chairman says, “is that … Americans born in the 1970s — today’s 30-somethings … are less willing to take investment risk than their counterparts born in the 1960s … this group is shy about investing in stocks.” In 2010, the share of households headed by 30-somethings that own stocks was lower than in any other cohort born after the Great Depression, he noted.