401(k) Archives - Page 2 of 4 - NorthStar Capital Advisors

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.

Accidental Success of the 401(k) Plan

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IBM and AOL Are Messing with Your 401(k)

401(k) accounts are an important part of many people’s retirement savings. And the employer match is a critical part of that system. So when big companies like IBM and AOL start monkeying with that match, you should pay attention because other companies may follow suit!

IBM changed its 401(k) system in 2012 to hand out employee matches in one lump sum at the end of the year leading to an uproar. IBM employees are now missing out on compounding throughout the year that they used to get from contributions peppered in throughout the year. In addition, if you leave IBM before December 15th and you’re not retiring, you lose the match entirely.

Experts warned that others would try to follow IBM’s example by watering down their 401(k) programs as well. Sure enough, AOL took things even further!

AOL said starting in 2014, an employee must be active on December 31st to receive the company match. Furthermore, the contribution will a “one time lump sum after the end of the Plan Year.” So you have to stay with the company through the end of year and you don’t even get the match during 2014!

The protest following AOL’s announcement was so intense, AOL chief Tim Armstrong reversed the changes to the 401(k) policy after just one week of bad publicity.

401(k) Balances Hits Record High

Multiple years of strong stock market performance coupled with disciplined savings has propelled 401(k) accounts to a record high.

According to Fidelity Investments, the nation’s largest 401(k) provider, the average 401(k) balance reached $84,000 during the third quarter of 2013, up 11% from $75,900 the previous year. This is overall average is based on 12.6 million accounts.

401(k) savers that have been actively contributing to their accounts over the past 10 years saw their average balance grow $223,100, up 19.6% during the 12 months that ended in June.

Fidelity also reported that fewer 401(k) participants are relying on “do-it-yourself” investing and instead are moving toward managed accounts and target-date funds. Managed accounts provide individualized investment advice.

Timing the Market Doesn’t Pay

Participant account balances increased from Q3 2008 – Q1 2013

Although it is tempting to actively alter your investments in an attempt to avoid loss in anticipation of market lows, historical data show that such efforts tend to backfire. Fidelity, one of the largest 401(k) providers in the U.S., recently published an analysis of 12.3 million retirement accounts that vividly demonstrates the financial risks of market timing. It’s important to note the comprehensive nature of the study period, Q3 2008 – Q1 2013, which starts from the pre-recession market high of 2008, through the deep bottom of Q1 2009 and the recovery to new highs in Q1 2013.

The figure above compares average account balance growth among three participant groups: Those who changed their asset allocations to 0% equity in the Q4 of 2008 or Q1 of 2009 and never returned (left pair of bars), those who moved to 0% equity but returned to some portion of equities by the end of Q1 2013 (middle pair of bars), and those who maintained an equity allocation throughout the period (right pair of bars). The blue bars represent all retirement accounts while the green bars track pre-retirees defined as participants age 55 and older.

As the figure above shows, the differences in growth are remarkable. Those who stayed the course fared substantially better than those who retreated altogether or tried to time the market. Investors who completely retreated from the stock market in Q4 2008 and failed to return saw their accounts grow by only 14.8% in the following 5 years (left blue bar). Contrast this to the exceptional 88.4% growth enjoyed by investors who stayed the course by holding stocks throughout the market cycle (right blue bar).

The takeaway is the same for pre-retiree investors (green bars). Disciplined investors who didn’t touch their stocks saw ~60% growth whereas market timers saw only half as much and those that fully retreated from stocks saw disastrous results.

Source: Fidelity

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 doen 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

IRS Raising Limits on Retirement Contributions for 2013

Good news! The Internal Revenue Service has raised the annual limit on contributions to 401(k)s and individual retirement accounts.

The new contribution limits for 2013 are the following:

401(k): $17,500 ($23,000 if you are 50 years old or older)
Traditional/IRA Rollover: $5,500 ($6,500 if you are 50 years old or older)
Roth IRA: $5,500 ($6,500 if you are 50 years old or older)
SIMPLE IRA: $12,000 ($14,500 if you are 50 years old or older)
SEP IRA: $51,000 ($51,550 if you are 50 years old or older)

Remember you can still make IRA contributions until April 15, 2013 for tax year 2012 but the old 2012 contribution limits will apply.

Why is this good news?

First, it’s always nice to have the ability to defer taking the tax hit on a bit more money. Second, these increased contribution limits give you the opportunity to put aside more money for your retirement. This accumulation is often more important than allocation, particularly when you’re first staring off as an investor. Your personal savings rate, the amount of money you’re saving and investing for the future, is just as critical as your rate of return.

Ameriprise Employees Seek Class-Action Lawsuit Against Ameriprise for Bad 401(k)

Employees of Ameriprise Financial Inc. are suing their employer claiming Ameriprise loaded up the company 401(k) with its own expensive, underperforming mutual funds and charging employees excessive fees.

“Of any company, Ameriprise should know what is a good financial product,” said plaintiff’s lawyer Jerome Schlicter. Ameriprise is the largest employer of certified financial planners in the nation with over 14,000 employees.

Lawyers for Ameriprise argued there were sufficient non-Ameriprise fund choices. U.S. District Judge Susan Richard Nelson dismissed this rationale saying, “Merely including a sufficient mix of prudent investments along with imprudent options does not satisfy a fiduciary’s obligations.”

Most of Ameriprise’s in-house funds were labeled RiverSource funds before being rebranded Columbia after Ameriprise purchased the Columbia Management fund business from Bank of America.

The lawsuit also claims that Ameriprise used worker retirement assets to seed new and untested mutual funds to make the funds more marketable to outside investors and thus generate more profit for the company.

Source: The Star Tribune

Smart Money Newsletter ~ November 2012

The latest issue of Smart Money is hot off the press!

Smart Money is a NorthStar publication that covers financial education, money management, and investment strategies.

Here’s what you’ll find in the latest issue:

Financial Readiness — As Critical As Fully Charged Batteries
In light of the incredible impact of Megastorm Sandy last month, we want to spotlight the importance of “financial readiness” when it comes to disaster preparedness. It’s just as critical as filling the gas tank in your car and making sure you’ve got plenty of batteries ahead of an emergency.

What to Do With Your Old 401(k)?
Be it from changing jobs or retiring, it’s very common to have at least one old 401(k) account accumulating cobwebs in a dark corner of your financial closet. Shine a light there and make sure you’re doing the right thing. Here’s a quick overview of how to make a savvy decision with managing your old retirement accounts. Want more details? Check out our in-depth companion article on 401(k) choices available here.

Click the cover image to view or click here to download it directly. You can always get the latest issue of Smart Money by visiting www.nstarcapital.com/newsletters.

Given the universal importance of financial readiness, please do your friends and family a favor by sharing this article with them.

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