Reuters Money

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.

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).

Fidelity: Cost of retiree healthcare is falling

Fidelity Investments says the cost of healthcare in retirement is falling for the first time since the company began tracking health spending ten years ago — and the new healthcare reform law is getting the credit.

Fidelity estimates that a 65-year-old couple retiring this year will need $230,000 to pay for medical expenses throughout retirement, not including nursing-home care. That represents an eight percent decline from last year, when the estimate was $250,000 and the spending forecast jumped 4.2 percent.

The drop in this year’s forecast stems from changes to the Medicare prescription drug program contained in the Affordable Care Act (ACA) that reduce out-of-pocket spending by seniors. The law gradually closes the notorious “doughnut hole,” which is the gap in coverage that starts when a drug plan beneficiary’s annual drug costs hit $2,830 and continues up to $4,550, when “catastrophic” coverage kicks in.

This year, the ACA mandates that pharmaceutical companies provide a 50 percent discount on brand-name drugs to seniors who enter the doughnut hole. Starting in 2012, the gap itself will be closed gradually until it is eliminated completely in 2020.

Ninety percent of Medicare enrollees have Part D coverage, and Fidelity estimates that about 30 percent of them will enter the doughnut hole in any given year.

The Fidelity study assumes no employer-provided retiree health coverage, and a life expectancy from age 65 of 17 years for men and 20 for women. It includes spending for traditional Medicare premiums (Part B and Part D), out-of-pocket drug costs and a variety of other co-payments and deductibles.

Fidelity cautions that this year’s decline likely is a one-time event; the company still expects health expenses to keep rising over time due to higher costs for services, introduction of new technology and higher utilization of services such as diagnostic testing.

Fidelity: Millionaires don’t feel rich

A new survey from Fidelity Investments finds that millionaires aren’t feeling so rich these days.

More than four out of 10 American millionaires say they do not feel rich. In fact, participants say they need to have at least $7.5 million in order to feel they were truly rich.

The millionaires’ malaise also extends to sentiments about investing: Only a third of respondents say they have recovered all of the money they lost during the financial crisis of 2008, when U.S. stocks plunged and a shrinking economy fueled a lengthy recession. The vast majority of respondents feel more knowledgeable about the markets, but also more conservative as investors.

However, there is some evidence wealthy Americans are starting to regain their confidence in stocks: 43 percent said they will invest more in the market over the next 12 months, compared with 11 percent likely to pull money out.

New Fidelity program tackles retirement income planning

Throughout its history, Fidelity Investments — the nation’s biggest provider of workplaces retirement savings plans and Individual Retirement Accounts — has excelled at helping investors accumulate money for retirement. Now Fidelity is responding to an even bigger (and, arguably, more important) challenge: Helping baby boomers make their money last in retirement.

“Customers are saying I need help with the nest egg I’ve accumulated,” says John Sweeney, executive vice president, Planning and Advisory Services at Boston-based Fidelity.

Like many baby boomers, Fidelity is turning 65 this year. And to help those Baby Boomers make the transition from saving money to spending it, Fidelity has created a retirement income strategy program. Launched on Feb. 2, it features the high-octane Income Strategy Evaluator, a powerful planning tool which allows investors to make a holistic assessment of their income needs by evaluating monthly expenses, retirement savings and potential investment strategies.

After you figure out how much income you’ll need in retirement, you will get a tailor-made income strategy. The sample evaluation I looked at offered up a mix investment products, including fixed and variable annuities.The entire process takes about 45 minutes to complete.

Admittedly, after the one-hour test drive, my head was spinning. That’s because the tool offers lots of interactive data points — for example, you can estimate the monthly returns of your investments under different market conditions. While the Income Strategy Evaluator is available to everyone, if you’re a Fidelity customer, many of the variables, including your tax rate and portfolio holdings, should be pre-populated, which should cut the time spent inputting data.

I’m sure a few enterprising individuals will want to model their retirement income options on their own, but the Income Strategy Evaluator is clearly designed to be used with a financial professional holding your hand (or computer mouse). And you’ll definitely want to talk to a professional before you implement the plan.

Fidelity is launching its new retirement income planning service with a 30-day education program, including 200 seminars at Fidelity branches and other locations. You’ll also see advertising for the program in newspapers and magazines in the coming months.

Fidelity: Paying off debt, saving cash are top New Year’s resolutions

In addition to losing weight and hitting the gym more often, there’s a good chance your resolutions for 2011 include a financial goal. A new study from Fidelity Investments finds that 43 percent of Americans are considering a financial goal for the new year, up by as much as 23 percent from 2009.

The impetus? The financial crisis, naturally.

And what kind of goals are they considering? The Fidelity study finds that 50 percent of respondents plan to build an emergency fund and 49 percent aim to pay down credit card debt. One sure-fire way to meet those goals is to set up monthly — or even weekly — contributions to a savings account, says Keri Dogan, who heads Fidelity’s IRA, rollover and college savings business. “It’s a lot less painful,” says Dogan, who has made a resolution to practice yoga more often next year.

Fidelity clients are also asking for financial help — the Boston-based firm has seen a 25 percent jump in attendance at financial seminars. Fidelity has also provided 1.2 million “guidance interactions” with customers in the past year.

Fidelity’s findings echo another recent survey from the Principal Financial Group. According to the Principal Financial Well-Being Index, the top two financial resolutions for 2011 are paying off credit card debt (35 percent of respondents) and saving money in an account each month (30 percent).

What’s your financial resolution for 2011? Send us your wish list. As the year comes to a close, we’ll be asking experts for advice.

Investors say advisers can’t beat S&P 500

Here is more proof that investors are lowering the bar when it comes investment performance.

New research from Wealthfront finds that only 6 percent of all U.S. adults, and only 3 percent of those who work with a financial adviser, “strongly agree” that their financial advisers know how to consistently outperform the market. The August 2010 study was conducted by telephone by Harris Interactive.

Another recent study commissioned by Fidelity Investments found that 55 percent of investors say any kind of positive gain in their portfolios in these volatile markets qualifies as a “success.” And another 23 percent say break-even investment returns can be considered an achievement.

That’s precisely why Wealthfront sees such investor malaise as a business opportunity. If you haven’t heard of Wealthfront before it’s because it is the newly branded version KaChing, a site whose name was catchy with investors but didn’t resonate with the money managers.

Wealthfront hooks up mass affluent investors ($100,000 to $1.5 million) with investment managers who typically cater to ultra-wealthy investors. For a minimum of $10,000, investors get access to 25 money managers which span from Forward Funds (the only mutual fund family on the list) to Tradewinds Investment (an emerging markets hedge fund).

Andy Rachleff, Wealthfront’s president and CEO, says Wealthfront’s primary mission is to help investors beat the market. Wealthfront’s 10 investment managers collectively outperformed the S&P 500 by more than 6 percentage points, net of fees, he says. And they did so with “full portfolio transparency,” he notes. (The firm now works with 25 managers.)

Is breaking even the new normal for investors?

Investors are lowering the bar when it comes to measuring financial success.

According to a new survey from Fidelity Investments, 55 percent of investors say any kind of positive gain in their portfolios in these volatile markets qualifies as a “success.” And another 23 percent say break-even investment returns can be considered an achievement.

Market volatility is the culprit for these diminished expectations. According to Fidelity, 41 percent of the trading days in the past two years experienced at least a 100-point rise or fall in the closing price of the Dow Jones Industrial Average. No wonder that 40 percent of the 754 investors Fidelity surveyed say they are seeking lower risk in their portfolio today as compared to two years ago.

Other key findings:

·         57 percent investors surveyed say they still lack confidence in their ability to make sound investing decisions.

·         Some investors are simply disengaged: roughly 20 percent say they either pulled out of the market or stopped monitoring their investments altogether.

·         When asked about their biggest investing concerns over the next 12 months, investors rank domestic economic instability (31 percent), unemployment (29 percent) and potential tax rate increases (15 percent) as their top three worries.

Fidelity leads in retirement plan assets

When it comes to managing retirement plans, Fidelity Investments is still America’s biggest asset manager, according to Brightscope, which independently rates retirement plans. In an exclusive ranking for Reuters, Brightscope looked at retirement plan managers by the total value of assets in their funds in the corporate retirement market.

Here is a look at the top five asset managers for retirement plans:

#1: Fidelity Investments

What makes Fidelity so special? Size certainly matters. Fidelity is the biggest recordkeeper of 401(k) plans with more than $500 billion in assets under management. “There is still no better way to increase 401(k) distribution than to control the recordkeeping platform,” says Ryan Alfred, co-founder and president of Brightscope.

Fidelity also has 50 of the 250 funds with more than $1 billion in retirement plan assets. It offers some of the nation’s most popular funds within 401(k) plans: Fidelity Contrafund, Fidelity Diversified International and Fidelity Spartan 500 funds.

#2: Vanguard Group

Vanguard recently leapfrogged Fidelity as the largest mutual fund complex by assets with $1.3 trillion. “It is no surprise that they are neck and neck with Fidelity for the top spot in the retirement marketplace,” Alfred says.

Families crack retirement nest eggs to fund college

Renée Hirshfield didn’t expect to tap her retirement account to pay for her daughter’s college tuition. But when she opened the bill for Sarah’s junior year at Mount Holyoke College, sticker shock set in.

“She had been getting a fair amount of financial aid, but there had been a slight spike in my income the year before,” says Hirshfield, a small business owner in St. Louis. “That pushed the formula for my expected share of the bill to about double what it had been before. I was blindsided.”

Hirshfield, who is divorced, gets some assistance on tuition from her ex-husband. Her father also had been helping out, but at age 93, he moved recently to an assisted living facility that costs $5,000 each month. “Now I need to come up with ways to shore up his finances, and cover the college bills,” she says. “I’m the sandwich generation.”

The financial stress pushed Hirshfield (pictured left with her daughter Sarah) to liquidate a variety of investments and savings to cover Sarah’s junior year, including a $3,000 Individual Retirement Account. That put Hirshfield among a growing subset of families tapping retirement accounts to fund soaring tuition bills in the midst of the toughest economic climate since the Great Depression.

The number of families raiding retirement accounts for college this year has doubled, according to a new study by Gallup and student lending giant Sallie Mae. The study of more than 1,600 families with college-age children found that 7 percent withdrew or borrowed funds from a 401(k) or IRA for the 2009-2010 academic year, up from 3 percent in the previous year.

And the amounts withdrawn or borrowed increased to $8,554, up from $5,318 in the previous year. “That kind of change in a single year is very significant, and very worrisome,” said Sarah Ducich, senior vice president, public policy at Sallie Mae.

The Sallie Mae study found that families continue to place a very high value on higher education, with 83 percent agreeing that it’s a key investment in the future of their children. Parents are cutting spending and working harder to pay for college, and the expenses are putting greater stress on all sources of saved and borrowed funds.