401(k) plan

401(k) funds studied for less time than car purchases

By Walter Hamilton (originally published on LATimes.com)

Americans know that 401(k) retirement plans are important, but they spend only a moderate time researching investments and are often confused about how to pick the best funds, according to a new survey.

Nearly nine in 10 workers view 401(k) plans as essential employee benefits, far outdistancing disability insurance, extra vacation days and the option to work from home, according to the poll by Charles Schwab Corp.

But the typical employee spends only about two hours analyzing 401(k) choices, roughly half the time spent researching car purchases or vacations.

Half of poll respondents said their 401(k)s are more confusing than the medical plans.

Only about one-quarter of survey participants have sought professional advice with their 401(k)s, according to the survey. That’s far less than the 87% who pay a professional to change the oil in their car.

“With so much at stake, the industry needs to take a more active role in delivering personalized investment advice to help individuals’ 401(k)s work harder for them,” said Steve Anderson, head of Schwab Retirement Plan Services.

One-for-all default investments, such as target date funds or balanced funds, can’t be expected to meet the individual needs of workers,” he said. “The industry can do better.”

However, earlier research has shown that employees must be extremely careful about 401(k) advice.

It’s not in the brokerage house’s best interests to make things simple. It’s better for them to offer a wide array of funds for two reasons: 1) Those customers who are financially astute demand it and 2) a wide variety of funds makes it easier for their sales weasels to work…

A study by the U.S. General Accountability Office in 2011 found that what passed as education offered by firms running 401(k) plans often was little more than a sales pitch designed to push high-cost investments on unsuspecting employees.

From Michael Goodman

If you want to discuss your retirement planning.  Let me know.  I can show you ways to increase your retirement income while keeping your money safe from market losses.

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High Fees for 401(k) Participants

High Fees, Poor Choices Vex 401(k) Participants, Study Says

July 24, 2013

(originally published on Financial Advisor)

High-cost investment choices by consumers and fiduciaries are substantially hurting 401(k) returns, according to a new study.

More than 44 percent of 401(k) losses due to investor mistakes are attributable to choosing investment options with excessive fees relative to other funds on the menu, according to the study.

At the same time, investors sacrifice 7.7 percent of potential returns because 401(k) fiduciaries’ offerings aren’t diversified enough and carry high fees.

University of Virginia law professor Quinn Curtis and Yale law professor Ian Ayers analyzed 2009 data from 12,475 plans supplied by Brightscope Inc. to conduct the study.

“Investors incur unnecessary losses due to fiduciaries’ decisions to include a preponderance of costly funds in plan menus,” the Curtis and Ayers study pointed out.

Participants in plans that include a low proportion of index funds have lower expected performance, Curtis and Ayers said. Small plans frequently have higher costs and lower-quality choices, they added.

Plan participants have won substantial court settlements by alleging that investment menus included only options that were too costly, they noted.

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Today’s Economy May Make Tax-Deferred 401(k) Plans A Bad Deal

(The article below was published on the website FA-Mag.com today.  While I agree with the author’s description of the problem, I believe he ignored one valuable solution.  My response is shown below the article.)

Today’s Economy May Make Tax-Deferred 401(k) Plans A Bad Deal

June 19, 2013 • Gary A Borowiec

For decades, advising your clients to invest as much as possible in tax-deferred, employee-sponsored 401(k) plans seemed to make great sense. Designed to reduce taxable income in pre-retirement years when participants’ tax brackets are typically at their highest, this convenient savings vehicle enables investors to pay taxes on their assets in post-retirement when tax brackets are likely to be lower than in earning years. But in today’s economic climate, many of your clients face a new challenge: one in which the bulk of their pre-retirement years are taking place in a time of historically low tax brackets. Suddenly this “no brainer” investment approach may need some serious rethinking.

401(k) plans were first introduced back in 1978 when the top tax bracket was a mind-boggling 70%. In that environment, deferring taxes created a significant advantage since it was unlikely high-income earners would be taxed at an equivalent tax rate in post retirement. But 2013 presents a very different picture. Today’s top tax rate is 39.6%—nearly 30% less than in 1978. But this rate is unlikely to remain for long. The January 1 enactment of the American Taxpayer Relief Act (ATRA) was the first sign of an upward shift. Historically, tax rates have increased substantially in the decade following every major U.S. war. The U.S. has been engaged in the War Against Terror since 2001 at a cost of more than $1.5 trillion. As government debt continues to mount, increases in tax rates are inevitable. For today’s investors, this means tax rates may very well rise during their retirement years, reversing the assumed value of a tax-deferred savings plan.

Changing tax rates aren’t the only stumbling block for 401(k) investors. As tax rates have decreased over the past decade, stock values have plummeted. While inflation-adjusted stock values generally rose between 1978 and 1997, stock values are lower today than in the prior decade. With 401(k) plans performing at the worst levels in history, “wise” investors who diligently poured their savings into 401(k)s during that period saw their account values steadily decline for a decade. And while it is assumed that stock values will climb again, no one can say how much and how soon, or when yet another bear market may jolt the market again.

So what’s the answer? There is no simple solution, but guiding your clients toward an approach that hedges against the risk of both tax rate increases and decreased stock values may give them a much safer path toward protecting their retirement savings.

To begin, it may make sense to forgo the small deduction that comes with deferring taxes on savings today in favor of much larger tax benefits later. In other words, it may be better to pay tax on the “seed” instead of paying tax on the “harvest”—especially when taxes are likely to be considerable higher when that harvest is reaped. The good news is many employers have recently added one or both of the following enhancements to their company-sponsored 401(k) plans:

Roth Provision 401(k)—This new option allows participants to choose from the same investment options and choices in their company plan. Rather than deferring taxes, the employee pays current taxes on all income earned, making the Roth 401(k) portion of the account tax free during retirement—including both contributions and growth. Unlike the Roth IRA, there is no income limit for participation or mandatory distribution cycle, and building this large, tax-free nest egg greatly simplifies retirement income planning during the distribution phase.

Company Plan In-Service Withdrawals—In the past, money saved in a 401(k) plan was held captive until the employee left the company. The in-service withdrawal option allows participants to rollover existing 401(k) savings into an IRA (which can then be converted to a Roth if desired) while still working for the employer. This flexibility helps investors by opening the door for greater investment diversification, while also taking advantage of tax diversification.

Both of these options can provide significant benefits by enabling your clients to take full advantage of their employee-sponsored 401(k) plans—including company match programs when available—while also making smarter choices about how and when to pay taxes on their savings. Both options also provide the opportunity for much greater portfolio diversification.

No one can see the future. You and your clients know the direction of tax rates and stock values in the coming decades is fixed only by speculation. The rules have certainly changed, but by carefully considering the role these new company plan options play in each clients’ financial plan, you can help them make smarter choices that accurately reflect today’s economic landscape and help support a more comfortable, tax-efficient retirement.

Gary A Borowiec, CLU, ChFC, RFC, LUTCF, CLTC, is managing partner of Atlas Advisory Group LLC, an independent planning firm based in Cranford, NJ. A member firm of M Financial Group, Atlas Advisory Group specializes in investment tax planning and wealth transfer for executives. Independently owned and operated, Atlas Advisory Group  is a registered broker-dealer and investment advisor (RIA). Member Finra/SIPC.


Michael’s Response to this article:  For many people, a better solution to the problem mentioned is to stop funding their 401k (or never start one) and put the money into an indexed universal life insurance policy instead.  The premiums paid into an IUL (which do not have the annual restrictions of a Roth) will not offer an immediate tax deduction, but the cash value may build faster, can be accessed without penalties or income taxes before age 59 1/2 using zero-rate or low-cost policy loans, and can be used as a tax-free retirement income supplement at any time you choose to retire.  Whenever the worker dies, his heirs will receive a large tax-free estate instead of the balance in the account and a tax bill.  Do you agree or disagree?  Please let me know by clicking on the Comments section.

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