Tag Archives: 401k rollover

401k funds problems

The Problem with 401K Funds

These three problems in 401K funds may put your retirement goals out of reach

More than 52 million Americans participate in a 401K plan with about 515,000 plans across the country. Those plans hold $4.4 trillion and represent nearly a fifth (18%) of the $24 trillion in U.S. retirement assets. 401K funds are truly the life-blood of our retirement savings.

It’s too bad these funds are riddled with problems and costs that make reaching your retirement goals nearly impossible.

Costs and Other Problems with 401K Funds

The biggest problem with 401K funds, one that goes almost completely unnoticed is the fact that most funds are completely inappropriate for savers’ needs. The problem is how mutual funds are constructed, based on an index that they follow. For example, a broad market mutual fund might be constructed to track the S&P 500 which is an index of the largest American companies.

The S&P index itself is put together by weighting the top 500 companies by size. This means that a huge company like Amazon accounts for 5% of the index while United States Steel Corporation is just 0.000176% of the index. It turns out, your investment in a 401K fund that tracks the S&P 500 doesn’t really track the stock market but depends on the performance of a very few large companies.

More arbitrary still is the way other indexes are constructed. Some indexes are constructed using a price-weighted scheme, which means stocks with high prices account for more weight of the fund than low-price stocks. The 3M Corporation at $165 per share is the highest priced stock in the Dow Jones and carries a much higher weight than technology leader Cisco Systems at a price of $27 per share.

None of these two ways that indexes are constructed, and by proxy how mutual funds are constructed since they track the indexes, has anything to do with growth or potential for return. Investing your 401K money in these funds is completely arbitrary and ridiculous.

The next problem with 401K funds, one that gets more attention than the index problem, is that of high costs in mutual funds. There are a mountain of fees that come with your 401K plan, some from the mutual fund itself and some from your plan administrator.

Management expenses as high as 2% are common and mutual funds in general charge between 1.3% and 1.5% in annual expenses. That’s well above the average expense ratio of 0.4% for an exchange traded fund (ETF) which is a type of fund that trades like any other stock. A difference of 1.1% might not seem like much but adds up over time.

costs of 401K funds

Besides the high annual fee charged on most 401K mutual funds, many investors are pushed into the funds that benefit their advisor rather than themselves. 401K plans may limit your investment options to specific funds or advisors may just steer you to the ones that pay the highest 12b-1 load fees. Those load fees are commissions paid by the fund back to the advisor and are generally 5% of your investment.

You might be investing $1,000 in a fund with a front-end load fee but only $950 will make it into your account after the advisor gets his cut. Back-end load fees are even worse because the percentage is taken off of the original investment amount plus the gains when you sell the fund.

Finally, there’s the issue of control in your 401K funds. Besides the limitation to funds that pay the highest commissions to advisors, many 401K plans limit their fund selection simply because the advisor doesn’t want to take the time to discuss the options with clients. They reason that by including broad market funds in the plan, investors have access to everything and don’t need to know about more specific investments.

Few 401K plans offer the opportunity to invest in individual stocks, bonds or other assets. While some may allow investment in a precious metals fund, these funds miss the benefits of holding physical assets in your retirement savings. Even if you are able to get your 401K plan to allow investment in a wider range of investments, good luck getting your advisor on the phone to make a trade. By the time your advisor gets around to actually buying the investment, you might have missed out on the opportunity.

Fixing the 401K Fund Problem

The solution to the high costs and other problems with 401K funds is…to not invest in 401K funds. That’s not saying don’t take advantage of an employer match on contributions or the tax advantages that come with a retirement plan but using an individual retirement account (IRA) whenever possible. Employer-sponsored plans are great for getting an initial boost from matching but not so great for long-term investment.

You can get out of the problem with 401K funds through a 401K rollover, always available when you leave your employer and sometimes even available while you’re still working as an in-service 401K rollover. The rollover process is straight-forward and just requires a few forms to avoid 401K withdrawal penalties.

When you transfer your retirement savings to an individual retirement account (IRA), you have full control over the assets and how investments are made. You can invest in individual stocks or other assets as well as in the universe of exchange traded funds (ETFs) which almost always carry lower expense ratios than their mutual fund counterparts. Take control of your retirement planning with an IRA and ditch the high fees and hidden costs of 401K funds.

retirement planning for financial crisis america

Preparing Your Retirement for the Worst in America’s Future

Prepare your retirement for these what-if scenarios in America’s future to ensure the retirement you deserve

I am not generally a doom and gloom kind of guy when it comes to retirement planning and America’s future. Against the perennial calls for some kind of catastrophic end to life as we know it, the future seems to become the past with little to change my rational perspective.

There’s always the possibility that one of the storm clouds on America’s horizon could turn into a full-blown tempest. More often than not, the future tends to look like the past.

The problem with this optimistic outlook on retirement is that it doesn’t account for the pain that occurs if something does happen. There may be only a small chance that a financial catastrophe happens but it could completely wipe out your retirement savings and leave you destitute in what should have been your best years.

Even on the off chance that the worst of the worst scenarios in America’s future come to light, preparing your retirement plan can help you avoid the fallout.

3 Things that Could Go Horribly Wrong in America

1) A Productivity Crisis in America

The first scenario is actually one that has a very good chance of coming to pass and could be worse than anyone is predicting. Productivity growth, how much each worker produces, has fallen to less than one percent over the last five years. That’s well below the 2.1% average for the three decades before 2007 and a far cry from America’s golden age of 2.8% productivity growth from 1947 through 1973.

In fact, productivity growth over the last five years has been the lowest in recorded history.

retirement planning america future crisis

Productivity growth is closely linked to growth in wages and standard of living. If America’s workforce is not producing more goods and services per worker, wages stagnate (as they have done for the last several years) and inflation eats away at what you can buy. Since more than two-thirds of our economy is driven by consumer spending, the drop in wage growth flows through to historically low economic growth.

We actually know what is causing the drop in productivity growth. It’s poor policy decisions around corporate taxes, trade policy and education. I would like to think that the government can address these issues but I’m not leaving my retirement to chance.

Now combine low productivity of workers with the fact that 10,000 people are reaching retirement age every day through 2030 and you’ve got a real problem. Fewer workers producing at a slower pace means economic growth could fall to almost nothing. Investments that should hold up well include precious metals which will retain their value when the greenback crumbles and some healthcare companies which will continue to benefit on the aging of the country.

2) A Cyber-Attack Wipes Out Financial Records

Up to the last few years, cyber-attacks were something that happened to other people. This is changing as we all become virtually connected and 61% of cyber experts agree that there will be a major attack causing widespread harm by 2025, according to a Pew Internet Survey.

Cyber-warfare has become the preferred weapon of governments because they can cause irreversible damage while still claiming that independent groups were to blame. A major attack would go well beyond one company’s loss of credit card information as happened at Target in 2013. A major attack could wipe out financial records of huge sections of the population, setting us all back to zero.

Most critical financial data is backed up on multiple servers but what’s to stop the hackers from targeting those records as well. Besides real assets like precious metals, investors should protect themselves with other assets that can be physically-held like real estate and collectibles.

3) Massive Municipal Defaults Reach Far Beyond Detroit

retirement planning for financial crisis america When Detroit filed for bankruptcy on its $18 billion of debt in 2013, the financial system froze up but then thawed quickly enough that most saw it as a passing problem. While the people of Michigan were left in the cold as the government ignored the problem, a 30-year bond time bomb has continued to build in our financial system.

The Federal Reserve has created the problem with three decades of lower rates. Interest rate manipulation has made it easier for local governments to fund their wasteful programs with more debt, constantly taking out new loans to cover old loans and new projects.

Rates hit a bottom over the last few years and are starting to rise, putting state and local municipalities against the wall. They can’t afford new debt at higher rates and slow economic growth means they can’t pay off the debt that’s coming due. Puerto Rico has been able to keep creditors at bay on its $72 billion in debt but it won’t be long before it and many others start to default en masse.

The wave of municipal defaults will rock the financial system because many of the pension funds and insurance companies on which we rely are heavily invested in municipal bonds. When those bonds default, tens of millions of pensions will be wiped out and insurance policies will become worthless. The best defense is to take control of your own retirement assets with a 401K rollover into an individual retirement account (IRA). You’ll have greater flexibility in your investments and better control of where your money is used.

These three scenarios are not the only ones that could occur, wiping out America’s economic future and your hope for the retirement you deserve. While a catastrophic crisis is still a lower-odds event, it pays to prepare by positioning your IRA investments for these what-if ideas.

when 401K rollover not a good idea

When is a 401K Rollover Not a Good Idea?

A 401K rollover is one of the best ways to prepare for your financial future but when is a 401K rollover not a good idea?

When you leave an employer after contributing to the sponsored 401K plan, you generally have one of three options. You can leave the investments with the old “orphaned” 401K plan, you can roll your 401K assets into a new plan at a new employer or you can do a 401K rollover into an individual retirement account (IRA) which you control.

The most popular, and often the best option is to roll the 401K investments into an IRA account. This keeps your retirement savings in one place and gives you the greatest control over your financial future.

But it turns out there are a few instances when a 401K rollover is not the best option for your money. Managing your money to meet your retirement goals shouldn’t be complicated but government rules on investing and legal protection have made it so. Make sure you’re not in one of these three circumstances before you start the 401K rollover process.

When a 401K Rollover Might Not be Such a Great Idea

A Stable Value Fund is a fund option in 401K plans that provides principal protection and a return slightly higher than money market investments. The fund is generally called something like a ‘capital preservation’ or ‘fixed-interest’ fund and the group has returned an average 2.7% annually over the last five years. The funds are highly regulated by the government to provide the promised layers of protection and may be backed by an annuity contract.

The specific Stable Value Fund in which you invest may not be available in another 401K plan or you may have to create a similar fund out of investments that can mimic the return in your IRA. This reason for maintaining your old 401K plan is the weakest of the three because there are other options available. Transferring your investments into an IRA, you can ask the transfer representative which options might be available to reproduce the safety and return of a stable value fund.

A more serious issue in 401K rollovers is that of company stock. If you’ve invested heavily in the company stock and it’s appreciated, you might be facing a hefty tax bill depending on your rollover option.

  • Company stock transferred to an IRA will have the entire amount taxed as income when you withdraw the money. This could increase your income taxes in retirement and lead to a higher tax bill compared to capital gains taxes.
  • The alternative option for company stock is to roll it into a non-retirement account, paying income taxes on the amount you paid for the stock. You’ll pay capital gains taxes on the remaining amount when you sell the shares which may be a lower rate than your income tax bracket.

Federal law has jurisdiction over 401K assets and protects them from your creditors and personal law suits. IRAs fall under state law and you may not get the same protection. Make sure you check the laws in your state and whether your IRA assets are protected from creditors or other personal claims.

When is a 401K Rollover a Good Idea?

when 401K rollover not a good idea Despite the three instances where you’ll want to rethink a 401K rollover, the process really is the preferred choice in the majority of cases. Your investment options in a 401K plan are extremely limited, normally to the funds that offer your employer the largest kickback and the highest commission to the plan advisor. You’ll have more investment options in an IRA because you control the assets. Besides traditional stocks and bonds, you’ll be able to diversify your retirement assets in real investments like precious metals and even business startups.

While federal law may protect your 401K assets from creditors, it doesn’t protect them against the federal government or your old employer. Corporate malfeasance is on the rise and retirement plans are being raided or sent off to the government’s Pension Benefit Guaranty Corporation, which doesn’t have enough money to really guarantee pensions. An IRA puts you in control of your investments and relieves the risk of someone using your money for their own gain.

You work hard and shouldn’t have to work even harder to determine the best solution for your retirement assets. When you are ready to have more control over your retirement investments, consider the 401K rollover process and the advantages of an IRA. Contact us learn more about opening an IRA. This will give you the opportunity to choose the type of investments and really diversify your portfolio.