“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). Have questions or concerns? Send your questions to info@nstarcapital.com and we’ll do our very best to help.
Got retirement plans? Your spouse may disagree
A recent survey by Fidelity shows that wives and husband don’t share retirement-planning duties nor agree on the plan:
- Only 41% of couples surveyed handle retirement investment decisions together.
- Only 17% of couples say either spouse is prepared to assume sole responsibility of their retirement finances.
- Although women are more likely to outlive their husbands, only 35% of wives say they are completely confident in their ability to take over the finances. 72% of husbands feel they can.
- 33% of couples say they don’t agree or don’t know where they plan to retire.
- 62% of couples nearing retirement don’t agree on the age at which to stop working
- 47% of couples nearing retirement don’t agree on whether they will continue to work in retirement.
Here’s what you should do and know:
- Both husbands and wives should know where critical documents are kept
- Both need to know what to do if their spouse is no longer able to assist with financial decision-making
- Both should have an understanding of the family’s finances, savings, and investment goals.
- Both should become active in financial planning and meeting with the family’s financial and investment advisors.
- Both husbands and wives should talk about retirement and finances more often together for better agreement and mutual understanding.
Managing Your Money Through the Ages
THIS IS A MUST READ! The New York Times and NPR have mapped out a lifetime of spending, with links to stories on topics from paying for college to withdrawing money in retirement:
- Paying for financial advice: It makes a lot of sense to pay for help as the stakes get higher. But only if it’s the right kind of help.
- The different kinds of assistance: brokers vs. advisers
- Establishing a trusting relationship with an adviser
- Ask your financial adviser to sign a fiduciary pledge
- There are many more excellent articles
Why Do We Have Trouble with Financial Decisions?
The U.S. is in a retirement crisis and our behavior is a key driver. Why do we tend to make poor choices? Academic research is beginning to help us better understand why.
- People are financially illiterate since they lack understanding of
simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions. - Impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs
This is according to a study published by Dr. Justine Hastings, Dr. Olivia Mitchell, and the Michigan Retirement Research Center at the University of Michigan:
How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors (download here).
401(k) Generation Begins to Retire
The 401(k) generation is starting to retire and it’s not pretty. The median household lead by a 60 year-old with a 401(k) has LESS THAN ONE-QUARTER of what its need to maintain its standard of living in retirement!
401(k) – Too Much of a Good Thing?
Investing too much in your company’s stock? A Hewitt survey reveals that when company stock is a 401k option, people hold an average of 21% of company stock. This allocation is too large given that many experts recommend that company stock should be <10% of your portfolio (think Enron and Lehman Brothers).
Equity-Indexed Annuities? Roll your own…
Considering equity-indexed annuities? Roll your own to get similar advantages and skip the downsides. Instead of a $10,000 annuity, you could put $7,260 into a 3.25% 10-year certificate of deposit from Discover Bank and $2,740 into Vanguard Total Stock Market.
California Raiding the 401(k)?
Talk about raiding your 401(k)! This doesn’t sound like a good idea. (Calpers is the California Public Employee’s Retirement Systems, the nation’s largest pension fund)
Risk of Outliving Your Assets
In my opinion the risk of outliving your assets is far greater than the risk of loss on your investments — Roger Wohlner (CFP)
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