401(k) Archives - NorthStar Capital Advisors

What’s Wrong with the Financial Services Industry?

According to Barry Ritholtz, the big problems that plague the financial service industry are the following:

• Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute. And, it is difficult to charge excessive fees for these services.

• Confusion is not a bug, its a feature: Thus, the massive choice, the nonstop noise, confusing claims, contradictory experts all work to make this much a more complex exercise than it need be. This is by design.

• Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons. There is a difference between normal greed (human nature) and outright criminality. This is why strong regulators and enforcement cops are required.

• Incentives are misaligned: Too many people lack the patience to get rich slowly. Hence, not only do the wrong people work in finance, and some of the right people exercise bad judgment.

• Too many people have a hand in your pocket: The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have done an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.

Source: The Big Picture

Quick Check: Are Your Retirement Savings On Track?

The two greatest impacts on your retirement savings over time are starting early and saving consistently. Beyond that, how do you know if you’re on track to have enough set aside to retire comfortably? Fidelity Investments recently published convenient “rule of thumb” that provides convenient, age-based targets to help you gauge your progress.

What’s the end game look like?
If you’ve saved eight times your annual salary by your last year of work before retiring, you should have enough money to replace 85% of your annual income for a 25-year period, including social security.

Age-based targets for retirement savings. For example, at age 35 you should have saved one times your annual salary. By age 55 you should have 5 times your salary. Ultimately retire at age 67 with eight times your annual salary set aside in retirement savings.

Here are the key milestones for getting to 8x and beyond:

age 25: start saving for retirement beginning at 6% of annual salary and increasing this by 1% per year until it reaches 12%; employer provides a 3% matching contribution
ages 31-67: setting aside 12% of annual income for retirement savings with an additional 3% matching contribution from the employer
age 35: you should have saved one times your annual salary
age 45: you should have saved three times your annual salary
age 55: you should have saved five times your annual salary
age 67: retire with eight times your annual salary in retirement saves
age 67-92: live off your retirement savings

Recognize that this is a broad guide and each person’s requirements will vary by the specifics of their situation. Nonetheless, this provides a quick and easy reality check.

What if you check your actual retirement savings and you’re coming up short against these targets? Try to increase your retirement contributions to close the gap. Sit down with a financial planner to review your plans and your portfolios to make sure they are optimized for success.

Age-based retirement savings targets for an individual making $100,000 per year.

Source:
Fidelity Outlines Age-Based Savings Guidelines to Help Workers Stay on Track for Retirement

America — How are you saving?

Vanguard just released their annual report on the state of retirement savings in America: How America Saves 2018

There’s a ton of great info in the report, but we want to highlight some good news…and some bad news.

First, let’s start with the positives:

Participation rates: More people are enrolled in defined-contribution plans;

Portfolio composition: This has improved, as plans have moved away from random fund selection and toward either target-date funds or balanced funds;

Automatic enrollment: Up 300 percent since 2003;

Automatic annual deferral-rate increases: Two-thirds of participants do this;

Account balances: Most have increased substantially.

And, now the bad news:

Total savings: It’s still not enough, and it suggests a large swath of the public either doesn’t save enough or can’t save. You can blame some of it on lack of wage gains during the past few decades. The huge increase in the cost of health care, housing and education certainly doesn’t help. Nor does our profligate, consumption-driven lifestyle. But no matter the reason, the conclusion is inescapable: many Americans are not financially prepared to retire. Perhaps that’s why so many of them are working well into their 80s.

More nudges are needed: Savings for many people are not keeping pace with their pay increases. There is a tendency to set and forget 401(k) contributions, and not revisit the issue ever again. The solution is to have automatic increases for retirement-savings contributions as pay increases.

Target-date funds: These funds automatically adjust the balance of stocks and bonds over time, shifting more heavily toward bonds as the participant gets closer to retirement. The problem is that given increasing modern lifespans, these funds may end up being too conservative in the final decade or two of work for many participants.

To have and to have not: To paraphrase Hemingway, the rich are different: they not only have more money, they also have more retirement savings. The advantages of being wealthy are manifest versus middle- and lower-income savers. Although most of the investment industry targets the wealthy, the underfunded retirement plans of the rest of America continue to be a serious issue.

Spend some time reading through Vanguard’s report to not only help you get the best from your retirement-savings plan, but also help America do better with its future retirement.

Source: Vanguard

How to be a 401(k) Millionaire

Fidelity Investments, one of the largest retirement account administrators in the U.S., published a study that analyzed the characteristics of their 401(k) account holders who have amassed more than $1 million but make less than $150,000.

Here are 5 key lessons:

#1 — Start saving early
Beyond the obvious fact that the longer you save, the more you’ll potentially accumulate, contributing steadily over 30 to 40 years is especially beneficial in a tax-advantaged workplace retirement savings plan.

#2 — Contribute a minimum of 10% to 15%
Contributing 10% to 15% might sound like a lot, but that amount is meant to include contributions from your employer—such as your company match or profit sharing.

#3 — Meet your employer match
You’ve probably heard it many times, but it bears repeating that failing to contribute up to the full amount of a company match is like turning down “free” money.

#4 — Consider mutual funds that invest in stocks
Historical data suggests that a diversified portfolio of stocks can deliver higher returns than bonds or other fixed income investments over time.

#5 — Don’t cash out when changing jobs
Taking a distribution from your 401(k) account when you change jobs is hardly ever a good idea. It could trigger significant tax liability and early withdrawal penalties. When you take money out of your 401(k), you lose the opportunity for it to grow.

Source: Fidelity

7 Fatal Flaws in 401(k) Plans

Paul Merriman writes about seven fatal flaws in America’s 401(k) plans:

#1 Restricted Access
The first and biggest flaw in 401(k) plans is restricted access to the best investment choices

#2 Participation not required
I believe that many American households, with nothing saved for retirement, are headed by employed breadwinners who could participate in a 401(k) retirement plan

#3 Insufficient employer match
I also think employers should be required to match at least a quarter of what each employee contributes — after the waiting period, of course.

#4 Employees bear the costs
Many employers make their workers pay the costs of administering a 401(k) plan, which should be treated as an employee benefit that’s paid for by the company. In far too many cases, the costs paid by employees are hidden in the form of higher fees for investment funds.

#5 No Rollover IRA option
Federal law allows — but doesn’t require — employers to let employees move part or all of their 401(k) balances into a Rollover IRA while continuing to contribute to the company plan. All workers should have this option, which gives them access to virtually unlimited investment choices.

#6 Too much company stock
Corporate 401(K) plans often encourage participants to load up on company stock. There’s probably no way to stop this short of a federal law, because employers with publicly-traded stock love the steady market that’s created for their shares every payday.

#7 Default options are too safe
Too many plans steer contributions to low-performance investments. It’s bad enough that the employee’s default option in many plans is simply not to participate. But for those who do sign up, it’s equally wrong to have a default option of a stable value fund that virtually guarantees the employee will gradually lose some of the purchasing power of their savings.

Giving the Gift of Financial Planning

A Lifetime of Financial Knowledge Wrapped Up in a Bow

Stuck for ideas on what to give newlyweds, graduates, or new parents for Christmas or Hanukkah? Consider something nontraditional this year that will last a lifetime and never go out of style: a visit with a financial planner.

Giving someone a financial planning consultation is a unique way to show you care, and it can help set up a loved one for a successful financial future. Newlyweds, graduates, and new parents all are at the start of a new phase of their lives. A financial planning gift provides them with something that may last for decades.

Those experiencing life’s transitions will also face financial challenges. Whether it’s learning to budget as a couple, understanding retirement plan options at the first job after graduation, or starting to think about paying for college, many important financial decisions await young people today. You can help by putting financial planning front and center.

Maintain the Wedded Bliss

Money and finances are among the top issues that cause marital discord. A financial planner can help strategize for a happily-ever-after financial life. A good planner will spend time talking to the couple, helping them determine their mutual financial goals. There are so many topics a financial planner can help with, including: managing household expenses; reviewing assets, debts, and credit reports; creating a budget; discussing future goals and creating mutual goals such as buying a home; analyzing benefits; updating wills; and reviewing insurance coverage.

Help Graduates Start Right

Once the diploma is hanging on the wall, it’s tempting for new grads to overspend, racking up credit card debt and a new car loan when what they really need to be worrying about is paying down student loans and planning for retirement. A gift of financial planning can help a new graduate establish short- and long-term financial goals and develop a budget to meet those goals. A financial planner may also help the grad deal with the new challenge of filing taxes and make recommendations on how to allocate investments into 401(k) or other retirement savings vehicles.

Bringing Up Baby, or Babies

The government estimates that a middle-income family will spend more than a quarter of a million dollars to raise a child until he or she is 18. New parents will benefit by working with a financial planner to figure out how much money they’ll need to raise their child. A financial planner can help them create a savings safety net, create and stick to a budget, advise about life insurance and wills, and talk about saving for college.

Purchase a financial planning gift certificate for someone you care about and know you’ve made a lasting contribution!

“Pay to Play” in Your 401(k)

Think the roster of mutual funds in your 401(k) was selected because they represent the best options? Think again! Very often the decision is biased by payments between fund companies and the firms that package the 401(k) plan:

Mutual funds often make payments to companies for the privilege of appearing in their 401(k)
These “pay-to-play” arrangements can discourage plan providers from selecting the best funds for you or offering low-cost index funds since most of these do not match the payments from active funds
These payments obscure the true fees and costs of 401(k) plans
For example, the Pimco Total Return fund pays an estimated $145 million a year to get into 401(k) plans
Growth Fund of America pays $75 million a year
Dodge & Cox Stock pays $20 million a year

Exercise caution when deciding which funds to use in your 401(k).

Our firm has independently evaluated the investment options in the retirement plans offered by 100+ of America’s largest employers. At the NorthStar 401(k) Center, you’ll find information to help you understand your retirement plan investment options, and show you the best way to allocate your portfolio based on your own risk tolerance and investment goals.

Have questions or concerns? Send your questions to info@nstarcapital.com and we’ll do our very best to help.

Remove Hidden Risks from Your 401(k)

Have you heard of Valeant Phramaceuticals? Or how about the Sequoia Fund? Valeant is a drugmaker whose stock price has tumbled 70% this year on a potential accounting scandal. Sequoia is a mutual fund who took an out-sized stake in Valeant. Sequoia has fallen sharply, trails 98% of its peers, and their CEO just resigned.

Why should all this matter to you? First, if you’re employed at one of the 50+ American companies that offers the Sequoia Fund as a retirement plan investment option, you may be unwittingly part of this debacle. Second, if you’re lucky enough not to be directly impacted, you should take this as a lesson and an opportunity remove similar risks from your retirement portfolio.

Incredibly, the Sequoia Fund is one of the most widely held investment options for Walt Disney employees. It’s relatively rare for major employers to offer risky mutual funds like Sequoia that make concentrated bets. Such “high-octane” funds have no business being present in 401(k)’s and similar retirement plans. Plan sponsors could even face class-action lawsuits from investors caught up in this avoidable mess.

How can you protect yourself?

Step #1: Educate yourself about what’s in your retirement portfolio.
Step #2: Pivot toward a massively diversified portfolio that favors low-cost, tax efficient index funds versus expensive, actively managed funds like Sequoia.
Step #3: Visit 401k.nstarcapital.com to access portfolio recommendations for +120 company retirement plans. Don’t see your company in the list? Shoot us an email (info@nstarcapital.com) and we’ll add your plan!

Companies Push to Boost 401(k) Savings

The most important driver of wealth creation is investor behavior, not investment performance. Taking their queues from research in behavior finance, big companies are helping steer investors to make good decisions and help secure their financial future.

New data reported by the Vanguard Group shows that

nearly 100% of the companies advised by Vanguard have default enrollment (i.e., employees are automatically enrolled in the retirement plan unless s/he opts out)
39% of plans automatically deduct 4% or more of employee’s pay for retirement contributions
~70% of plans automatically increase the employee’s contribution annually
~95% of plans automatically invest contributions in a target-date fund

These three actions — auto-enrollment, auto-increase, and target-date fund default investment — are considered best-in-class behaviors for employers and they’re becoming more prevalent.

Source: WSJ

Clinton’s Capital Gains Tax and Your Investments

Presidential candidate Hillary Clinton has put forward a major change to current capital-gains tax rates in an effort to get corporate managers to focus on long-term growth. Under Clinton’s proposal, investors would have to hold an investment for 6 years instead of the current 1-year requirement to qualify for the lowest rate on capital gains.

But what’s the impact on individual investors like yourself?

Tax experts say most investors will feel no impact from this proposal for two reasons:

#1 Clinton’s proposed changes would affect only people in the top income-tax bracket
That bracket begins at $464,850 for married couples filing jointly and $411,500 for single filers in 2015.

#2 Many investors hold most of their investments within tax-sheltered retirement accounts such as IRAs and 401(k) plans.
These assets grow tax-free until withdrawal at which point proceeds are usually taxed as ordinary income and not eligible for the more favorable capital-gains tax rates.

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