8/16/2013 4:30 PM ET|
Why workers are botching their 401k investments
A study finds that employees are making 2 major mistakes when it comes to retirement funds, putting their financial security at risk.
More workers are putting money into their 401k's, but nearly half don't know what their best investment options are, and one-third are stressed out about it, according to a study released this week by Charles Schwab.
The study finds that 57% of 401k participants wish there was an easier way to figure out how to choose the right) investments. More than half find explanations even more confusing than explanations of their health-care benefits. That confusion could have serious consequences for workers down the road.
"The big risk is that they end up with a nest egg that's far short of where it needs to be to fund their retirement," says Jack VanDerhei, a research director at the Employee Benefit Research Institute. That's troubling, considering that 61% of those surveyed by Schwab report that their 401k is their only or their largest source of retirement savings.
The 401k account is one of the best ways for employees to save for retirement. You can't beat the tax breaks, and if your company offers an employee match, that's free money. This year, workers can stash up to $17,500 in the accounts, and those over age 50 can put away an additional $5,500.
But employees are largely responsible for determining how to invest that money, and that's where the potential problems lie. VanDerhei says novice investors make two major mistakes when it comes to their 401k's: Not having an asset allocation appropriate for their age, and putting too much of their 401k into company stock.
Employers are also aware that their workers are overwhelmed by their 401k choices. A Towers Watson study released last year found that only one in five large companies believe their employees generally make informed decisions about retirement savings, and only 26% believe their workers have realistic expectations about what defined contribution plans can provide.
"We all know that there's a problem [with employee confusion about 401ks] but fixing the problem is an issue," says Robyn Credico, a senior retirement consultant at Towers Watson. "Most employers feel that they're giving people the tools, but the employees aren't using them."
Two-thirds of companies offer some sort of investment advice along with their 401k plan, according to a study by the Society for Human Resource Management. The organization found that 55% of employers offered online advice, 44% provided one-on-one advice, and 41% offered group sessions. Another 39% of companies gave advice specifically about retirement.
If your employer offers such a benefit, take advantage of it. The Schwab survey found that investment confidence nearly doubles, when workers have the help of a financial professional.
VanDerhei recommends that investors overwhelmed by choices and unsure of how to appropriately invest should consider putting their money into a target-date fund (offered by about two-thirds of plans), which corresponds to the year in which an investor plans to retire and shifts assets from stocks to bonds as that year approaches. (Target-date funds are no guarantee that you'll be set in retirement. After the market crash in 2008, some investors suffered big losses because their target-date funds were inappropriately allocated.)
If you're selecting funds on your own, look for index funds, which tend to be cheaper and less risky than actively managed funds. Use the investor profile tool offered by your benefit provider (or this one by Vanguard) to get a suggested asset allocation based on your risk profile and goals.
Then plug potential funds into Morningstar.com to look find their expense ratio. For stock funds, you'll want an expense ratio that's below 1%, says Michael Kimmel, a wealth manager with WealthStream Advisors.
"The underlying costs are really important," Kimmel says. "People don't realize that they're paying money to the mutual fund companies, because it just comes out of their returns. But with high expenses, that's just one more hurdle to clear when it comes to returns."
When it comes to meeting your retirement goals, the amount you save is even more important than how you invest it. To that end, the workers surveyed by Schwab appear to be on the right track. More than half have increased their savings rates in the last two years, and 70% say their 401k is in better shape now than ever before. Three-quarters of those surveyed say their 401ks have recovered from the financial crisis about as fast or faster than expected.
Still, workers are far from where they need to be when it comes from retirement savings. At the end of last year, workers age 55 and older those closest to retirement had an average $255,000 in their 401k balances. That may seem like a large sum, but it may not cover all of their post-work expenses, a separate Fidelity study found that out-of-pocket healthcare costs for a typical retired couple total more than $200,000 alone.
"There are a lot of people out there who think they are a heck of a lot richer than they really are," VanDerhei says.
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we are botching are 401k's because cannot get a REAL dollar figure on the costs that are changed to out 401k's for service fees, user fees, etc.
It took a financial analyst(someone with a Masters in finance) six months to figure out what the fees were on his 401k and you expect the rest of us ordinary folks with only associates and bachelors degrees to figure out what the 401k hidden fee charges are? YOU HAVE GOT TO BE KIDDING!
The whole premise of this article is just WRONG. You can be as knowledgeable as a certified financial planner, read financial and economics texts every day, make all the 'right' moves in your investments, and some jack a s s e s and criminals in Wall Street screw you over by inventing things like CDOs that no one understands. Eventually the bubble bursts, not your fault, but your assets are now worth half. You can say, 'but look how they've come back!' in the meantime, we've all missed 6 years of 7% annual growth (only 10 years to double at that rate). I figure between 2000 and 2007 bubble bursts, neither of which I could control NOR could I plan for, my investments are making about 2 to 3% annually, IOW, just matching inflation. Would have been smarter to keep the cash in my mattress, if I consider how stressful it is to invest in such unstable markets.
Biggest mistake I see people make is not putting in the minimum to get the full employer match.
That's passing on free money. If your employer matches up to 5% of wages, an employee should be contributing at a minimum of 5%.
401K's are a good deal if your getting a decent match
...after the market crash in 2008, some investors suffered big losses because their target-date funds were inappropriately allocated.
What this does not say (it is said later in the article in part) is those that did not panic sell and, on top of not panic selling, increased contributions while the market was on sale are in far better than positive territory today. I also took the 2% reduction in SS and put that to work as a 401(k) contribution increase. When this year rolled around and the 4.2% 'break' reverted back to the normal 6.2%, I also left that contribution increase alone. Many spent the boost in take home - some put it to work, keeping the bonus and letting the growth compound.
While the recession did not feel good while it was happening, I'm sure glad I kept emotions in check.
I'm 55 and between the recession of 90 Savings and Loan scandal, the recession of 2000 dot com bust and scandal, and 2008 everything scandal IT WAS HARD TO STAY AHEAD. When's the next scandal boys? Remember what they always tell you. Don't time the market your in it for the long haul. That's Bull. It keeps your money in their hands and they win no matter what. Largest theft in human history. Time the market and diversify young people be proactive. Buy when everyone is selling sell when everyone is buying. Keep more than they recommend in cash always. If you want to play you have to move it around just like they do. Educate yourselves. Where money gathers so do thieves.
A lot of people have poor choices to pick from in their 401k.The Dow is up 7,000 points
since Obama took office.An index fund works great if one is offered.
I first started investing in 401K plans in the middle eighties with my last employer. The company went from pension plans to 401K plans. If an employee wanted to offset their future Social Security income their only choices for deferred compensation programs were 401K and IRA plans. Our only investment choices with my former employer’s companies plan were in a few mutual funds and our companies stock. I did the research and allocated my contributions to a diversified mixture of the 401K investments.
I tried my best to maximize my contributions. My company matched a portion of what I contributed and that was a bonus. After a time, the plan offered more mutual fund choices, and I did the research and diversified and reallocated my contributions and investments as needed. After time I was fully invested in my plan and my investments grew. My position was downsized and I lost my job. I kept my 401K plan with the company.
I was able to find a new job and I had to start over. Like my former employer, my current employer eliminated their pension plan and offered a 401K plan with employer matching contributions. I have been with my current company for over sixteen years. The plan has changed over the years. I have more mutual fund choices to invest in. The new law changes to 401K plans have made it easier to know the fees that are charged by each fund and to make a more educated decision to invest in the funds.
As in my last job I try to maximize my contributions and I also keep a close eye on all my investments. Each quarter I revaluate all of my investments in each plan and investment vehicles and I have and I tweak those investments when needed. My only criticism of the 401K plans I have been in is that I wish there were more investment choices and lower fees for those plans.
I would have preferred to invest my contributions to individual stocks and bonds than mutual funds. I would have also liked to see lower cost mutual index funds in my 401K choices. I have other investment vehicles I use besides my 401K plans. I have and IRA where I invest in individual stocks, and taxable accounts that have stocks, bonds, REITS, CD’s, and other financial instruments.
I am in my late fifties. I have been through up and down markets. I have survived recessions, gas shortages, inflation, and other market upheaval. I have lost jobs and had to start over. Through all the turmoil and anxiety I have held fast and kept up with my investment and retirement plans. I have learned not to lose my head when fear rules the financial markets and the doomsday forecasters are in the forefront.
With each passing year I get closer to my retirement and achieving all of my financial goals. A big part of my investment blueprint is contributing to the 401K plans the companies I worked for offered. If your company offers 401K plan with a company match you would be foolish not to contribute as much money as the match. You will be leaving money on the table if you did not invest.
As with any investments the more you know about the investment choices in the plan the better off you will be. My recommendation to anyone who invests in 401K plans is do the research and invest in a diverse financial mixture of mutual funds if that is your only choice.
To try investing in low cost funds and to at least put in enough money to get your companies match if they have one. If you can you should try and maximize your contributions or try to increase your contributions each year you work. The sooner you have a plan and start to invest the easier it will be when you get closer to retirement age.
I get SO tired of these BS articles and all of the idiot posters here who blame their stupidity and poor decisions on the bad guys from Wall Street. Take some personal responsibility! The reality is that most people WASTE FAR more $ than they should for their entire careers and them complain about not saving enough later. People need to stop wasting their money on McMansions, new BMW or Corvette leases every 2 years, vacations on the Riviera or in Costa Rica, vacation homes, ski trips, casino trips, snowmobiles, jet skis, liposiction, designer clothing, spa treatments, mistresses, DIVORCES, and year-round social and athletic activities for their "precious" little geniuses, artists, and future professional athletes! My wife and I have middle class incomes, and she retired 8 years ago to take care of the kids -- so whe have had only one steady income since then. That said, we're both around 50, have 1 kid in college and one in high school. In our 25 years of marriage we have saved until it hurt! While we have had some nice vacations, most have been the shorter weekend varieties at the lake, and most others have been funded (full or partially) with frequest flyer miles, hotel points, discounted fares, or butted-up with business trips to save some $. We have also bought used cars (nice ones, but usually at a 40-50% discount) and properly maintained and driven them until they died. (My Volvo S80 was bought for 1/2 the sticker price with 26,000 miles on it.. and it now has over 200,000 miles. I think we got a LOT better deal than the first owner! LOL)
Our home is nice, but I do most of the maintenance myself, including finishing my own basement -- and this has provided us with a LOT of room rather cheap, and also a 2nd kitchen and a great place for our kids to entertain their friends too. My wife LIKES to cook so we eat well at home, and she also enjoys buying ALL of her clothing on sale or on clearance. (I AM LUCKY...I know!) All loaded we have saved $200K in home equity, over $500K in 401Ks, almost $200K in IRAs, $75K in savings bonds, $100K in kids 529 accounts, $200K in other safe savings, and some other stuff. We also have some silver, gold, cash, beans, bullets (.22, .38, 9mm, .45ACP, 30/30, .32 Special, 45-70, .410, 16 GA, 12 GA) handy for just about ANY SHtF situation. Everyone in our home also knows how to use every weapon I own! (Our daughter is a GOOD shot... God help the bad guy who ever sees her as helpless! LOL)
I also watch the market closely and only invest in mutual funds with a higher return and lower cost than other funds in the specific investment class -- thankfully I am also a Trustee with the 401K at my employer so keeping good and CHEAP investment options there has been my focus there from day 1 also. I also never invest in ANYTHING unless I understand the goals of the manager... and if a good manager leaves I watch the fund closely to see if the new person is as good, and if not I BAIL!
We use credit cards SMARTLY, and pay them off monthy OR plan ahead with no-interest credit options if we have the need to spread it out without withdrawing from savings. We have 850+ credit scores and no other debt. I plan to work 10 years or at least until our youngest child is out of college, when we can then statrt to take $ from our 401k If we need it... and by then we should be fine... and by then our savings should also be higher than it is today... but If I lost my job tomorrow, all would be okay.
All of that said, there was a time when we WERE young and poor! We just learned very early in our marriage that the goal was NOT to have fun when we were 25-30... the goal was to have some fun then but to have a LOT of fun from the time we are 59 1/2 until the day we die!!!
OK folks 401(k)s are not going away. The day of the pension is quickly fading. You can complain and say it is not fair (and in many ways it is not) or you can do something about it. It astounds me how some people will comparison shop a dishwasher for a month and get the best "deal" and save a $100 but when it comes to their retirement most will just throw up their arms and just think it is too hard.
There are a lot of resources out there, much of it free of very inexpensive. Take the time, learn, ask questions, press your HR folks for information it is out there. Besides your home, this is probably the single biggest decision(s) you will be making financially.
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