401(k) | The Chicago Financial Planner

Should You Tap Your 401(k) to Buy Real Estate?

May 21, 2013 By Roger Wohlner 6 Comments

There was a recent article on the CNN/Money website entitled Amateur investors tap 401(k)s to buy homes that discussed an increasing trend of 401(k) investors who tap their accounts to buy houses. The thought process is to take advantage of the hot housing market in some areas on the country with money that would otherwise be locked up in a 401(k) until retirement. Home prices are appreciating in some markets, so what’s wrong with this strategy?

Plenty is wrong with it, let’s take a look.

You distrust Wall Street but you trust the housing market? Really?

The article cites the distrust that some of these investors have of Wall Street and a desire to own hard assets. I get the distrust of Wall Street in the wake of the 2008-2009 market drop. These same folks must have short memories regarding the role that the drop in housing values played in the recession and the lingering effects of on many families. Yes prices are low, but they are rising. Are you knowledgeable enough to know if the property that you are buying is really a good deal? Distrust Wall Street all you want, but the fact of the matter is that investors who hold a reasonably diversified portfolio saw their 401(k) and other investments recover within a couple of years of the 2009 market bottom.

Are you getting in too late?

According to the article, Wall Street Investors are also entering this market and in some cases have bid up the price of homes in many of these hot markets. Much like the John Hancock TV commercial touting the idea of getting back into the stock market now that it is at new highs, is this an ideal time to be taking your retirement funds and investing them into a “hot” housing market?

Are you smarter than the professional investors?

As mentioned above this opportunity has come to the attention of Wall Street investors. Think what you want about Wall Street, these firms have the resources in terms of capital and research that you don’t. I’m not saying that individual investors can’t outdo the professionals, but ask yourself are you one of these real estate investors who can? Do you want to risk your retirement savings to find out?

Understand the potential costs and risks

In order to get at your money in a 401(k) plan you will likely need to take a loan from the plan. There are no tax consequences of doing this and as long as you repay the loan there won’t be any. Understand, however, that if you leave your job before fully repaying the loan, any remaining loan balance could end up becoming a distribution which would trigger income taxes and a 10% penalty if you are under 59 ½.

Further there is a potential opportunity cost. Are you convinced that your real estate investment will outperform what you might have gained in your 401(k) plan? Additionally, if your investment goes south you might end up with a property that is worth less than you paid for it, you are paying back your loan on the 401(k), and the house might be underwater if there is a mortgage involved.

Look before you leap

Let’s be clear, I’m not against investing in real estate, in fact many have made their fortunes from doing just that. What I am against is a novice who has read about the opportunities in the housing market taking funds from their 401(k) and investing in something they barely understand.

Will this always end badly? No. This might be a successful route to take for someone who understands real estate investing and who understands the risks. If this doesn’t describe you ask yourself is this a good use of my retirement funds?

Please feel free to contact me with your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

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Filed Under: 401(k) Tagged With: 401(k), Amateur investor, Investing, Real estate, retirement

Your Old 401(k) Take it or Leave It?

April 22, 2013 By Roger Wohlner 2 Comments

One the decisions that you face when leaving a job is what to do with your 401(k) or other retirement plan balance. A recent study by the Government Accountability Office (the GAO) indicated that some financial services firms might be misleading workers into rolling their account balances into an IRA account versus other, potentially more beneficial alternatives. Let’s take a look at the main options available to you and discuss the pros and cons.

Off the bat, let’s assume that you are not going to take a distribution from the plan. This means taking the balance as cash and paying taxes on all or a portion of the money. Let’s also assume that you are not looking at special distribution options that arise from death, disability, or those available in some cases to workers who are at least 55.

This leaves the three options for discussion: leaving your balance in your former employer’s plan; rolling the balance into the plan of a new employer (if you are moving to a new employer); or rolling over to an IRA account. I’ve written about this in a prior post 401(k) Options When Leaving Your Job. I wanted to revisit these options in the context of the GAO study.

The GAO Study

An article on the CNBC site cited the following from the study:

“The GAO report said 401(k) plan service providers encourage customers to roll over money into IRAs, but may offer little information about other options.

“During our investigator’s calls, about a third of call center representatives of 401(k) plan service providers encouraged the caller to roll over 401(k) plan savings from the ex-employer’s plan to the service provider’s IRA products, and 12 did not mention the option to leave money in the current plan,” the GAO said.”

Further from the CNBC article:

“Multiple websites reviewed by the GAO also showed that fee disclosure was located in small print in footnotes, sometimes contradicting the main body of information.

“For example, one website stated in the main body of information on fees that it had no fee for selling funds, but a footnote stated that the $49.95 fee would be charged on redemption of funds held for 90 days or less if they were purchased through a proprietary service,” the GAO said.”

Essentially the study is critical of the apparent bias of a number of 401(k) providers to steer participants to an IRA account with their firm versus other options that might be available to them.

Leaving your balance with the old plan

This can be a good option for you if the plan offers a good variety of low cost, solid performing investment options. Often larger employers can use their buying power to drive administrative costs down and to offer very low cost, institutional quality index funds and actively managed options. If this is the case with your former plan, perhaps it makes sense to leave your balance in place.

The flip side of this is that not all plans offer low cost, high quality investment options. If this is the case in your situation perhaps you are better off rolling the balance to an IRA account or to your new employer’s plan if applicable. Additionally, will you pay attention to this money or will you be like far too many people who leave an old 401(k) with an old employer and forget about it?

Rolling over to a new employer’s plan

Much the same thought process as deciding whether to leave your balance in your former employer’s plan. You need to look at the quality of the options offered in your new employer’s plan and also try to get a handle on the plan’s costs.

If the new plan looks like a good option, then it might make sense to roll your balance over to your new company’s plan. This will eliminate the need to keep track of your balance with your old employer and might offer some additional advantages in terms of having a higher balance in the plan under certain circumstances.

On the other hand, if your new employer offers a lousy 401(k) plan, why put any additional money there?

Rolling to an IRA

Rolling your old 401(k) to an IRA might be appropriate if:

Neither your former employer’s nor your new employer’s 401(k) plans are top-notch.
You are comfortable managing and choosing your own investment options or you are working with a financial advisor who does this for you.
You are looking for a place to consolidate your retirement investments other than a current or new employer’s retirement plan account.

Certainly you should look at the IRA custodian’s account fees, any fees to buy or sell investments, and the availability of investment options that are appropriate for your situation. Additionally you are free to roll your account to an IRA at the custodian of your choice you are under no obligation to roll your account to an IRA with the firm that provides your old company’s 401(k) no matter how much they may urge you to do so.

In short the GAO study is a good one in that it highlights the need to ensure that 401(k) participants receive full and unbiased information as to their options upon leaving the company. This will put participants in a position to make the best decision for their situation.

Please feel free to contact me with questions about 401(k) rollover options or about your overall financial and retirement planning needs. Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

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Filed Under: 401(k) Tagged With: 401(k), GAO, Individual Retirement Account, retirement

Stock Market Highs and Your 401(k)

March 6, 2013 By Roger Wohlner 6 Comments

As you are probably aware, the Dow Jones Industrial Average closed at a record high of 14,296; the second day in row for a record close. Intra-day the index topped the 14,300 mark for the first time ever. By this benchmark we’ve now gotten past the financial crisis as the prior high was reached pre-crisis in 2007. The S&P 500 Index is also near record territory. During the financial crisis there was much handwringing about how the 401(k) had failed retirement savers. It was popular to refer to accounts with reduced balances from losses as a “201(k).”

As of the end of 2012, Fidelity reported that the average 401(k) account balance had risen some 12% during 2012 to $77,300 from $69,100 at the end of 2011. This is also up from early 2009 when the average was $46,100. Fidelity estimated that about 2/3 of the 2012 gains were from investment gains and the other 1/3 from a combination of employee salary deferrals and employer matches.

What do I do now with my 401(k) now?

If you are looking for profound, radical advice here, I suggest that you stop reading this article now. This will save you from wasting the next 30 seconds of your life.

Assuming that you are still here, the suggestions that I have for the current situation are the same as I would have offered a year ago, five years ago, or ten years ago. I would have made the same suggestions at the depths of the 2008-2009 financial crises as well.

Review and Rebalance

A market high is always a good time to review your 401(k) account to ensure that things are not too far out of balance. Ideally you have a target allocation for investments you chose. Generally if a client’s allocation varies by more than +/- 5% of the target we consider rebalancing. Given how quickly the market has risen this year your account might need some attention here.

Review your 401(k) account as part of your overall portfolio

If you have investments outside of your 401(k) plan such as taxable accounts (stocks, mutual funds, etc.); IRAs; a spouse’s retirement plan and the like this is a good point to review not only your 401(k) account but your overall portfolio. If you have a financial plan in place a market high is a good point to take stock of how you are tracking toward financial goals such as retirement. Are you ahead of schedule? If so perhaps this is a good point in time to not only rebalancing but to consider reducing the risk profile of your portfolio.

Take the long view

If you watch enough of CNBC or other cable financial news shows, or read enough articles on the web about investing you can probably find someone who will support any position ranging from an impending stock market Armageddon to someone saying this Bull Market will run for another five years or more. The route to go in my opinion is to largely ignore all of this hype, get a financial plan in place, and invest your 401(k) and any other investment holdings as a total portfolio in line with the goals and risk tolerance that flow out of the financial planning process.

Please feel free to contact me with your financial planning and investing questions.

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) holdings and all of your investments and to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

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Filed Under: 401(k) Tagged With: 401(k), Dow Jones Industrial Average, Financial plan, retirement, Stock market

The Ameriprise 401(k) Lawsuit – What Does it Mean to You?

February 13, 2013 By Roger Wohlner 4 Comments

A lawsuit brought by a group of current and former employees of financial services firm Ameriprise has been allowed to proceed. The suit alleges that Ameriprise violated their fiduciary obligations as the sponsor of the 401(k) plan it offers to employees. The main issue is that Ameriprise offered a number of its proprietary mutual funds as options in the plan; these funds were allegedly expensive compared to other non-proprietary options that could have been utilized. Further it is alleged that these funds paid revenue sharing and other fees to Ameriprise and several of its subsidiaries.

What does this mean to you as a 401(k) participant?

The implications of this suit are pretty clear. If Ameriprise is found to be guilty of breaching its Fiduciary duty by stocking their 401(k) plan with sub-par, expensive proprietary funds this moves us further along the path of accountability by retirement plan sponsors for the retirement plans offered to their employees in my opinion.

During 2012 your company (generally via its retirement plan provider) provided several disclosures regarding your 401(k) plan. While some of these disclosures were not all that revealing (and others may have been downright cryptic) these disclosures began to “open the curtain” a bit. In anticipation of these disclosures I am aware of several providers who improved their plan offerings as well as activity on the part of a number of plan sponsors who started to look at other platforms and providers for their organization’s 40(k) plan.

The temptation among many employees is to ignore information received about your 401(k). Hard to blame them, much of this information is poorly written and hard to understand. However, you would be wise to review the disclosures received and any future disclosure materials. Do your best to become an informed plan participant. Review the mutual funds (or other investments) offered. Are they typically at least in the top half of their category in terms of investment performance? Are the expenses low relative to other funds in the same fund peer group? Could less expensive share classes of the funds offered that be considered? This last point includes even low cost index funds that may be offered. For example, low cost Vanguard has several share classes that are lower in cost than their basic Investor share class.

I’m not necessarily advocating that you sue your employer for offering lousy investments or for sponsoring a plan that is sub-par, but there is nothing wrong with joining together with other co-workers and presenting your concerns about the plan to your employer. By definition a 401(k) plan and other defined contribution plans put the onus on you to save and invest for your own retirement.

What does this mean to organizations that sponsor 401(k) plans?

To say that companies who offer 401(k) plans, consultants and advisors (like yours truly), and ERISA attorneys are watching this suit with a great deal of interest is an understatement. Essentially this suit could say to employers that if you offer a crappy, high cost 401(k) plan with lousy investment choices it could cost you. And you know what, with the number of lousy 401(k) plans that I’ve seen offered over the course of my career this advisor would have no sympathy for Ameriprise and those involved with their plan should they lose the suit. Offering your own funds and receiving revenue sharing from them to boot, really? What’s OK about that? I wonder how much of their own money senior Ameriprise executives have in these proprietary funds.

My hope is that this suit will help motivate employers who don’t already focus on offering the best 401(k) plan possible to look at ways to improve their plan. I am fortunate to have a group of 401(k) sponsor clients whose main concern is doing the best that they can for their employees. Don’t get me wrong, these companies are concerned with meeting their Fiduciary obligations and managing their Fiduciary liability as a plan sponsor. I view these goals as being very consistent with offering a top-notch plan for their employees. From my experience a sound process to choose and monitor investments based upon an Investment Policy Statement generally results in a better result for the plan participants. Add to this a regular review of the plan providers (record keeper, custodian, etc.) and you have the ingredients of a solidly run plan.

I wonder what Tommy Lee Jones would say to the employees if he was used as a spokesperson to “sell” the 401(k) plan internally?

Morningstar.com is a great tool for reviewing and analyzing the mutual funds offered in your plan. I use this site every day; check out the free trial for their premium services.

If you are a 401(k) plan participant and would like some help allocating your account from among the choices available to you, and/or with your overall financial planning and investment needs please feel free to contact me.

Retirement plan sponsors, do you need an independent review of your company’s plan? Do you need help selecting a new plan provider? Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees? Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

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Filed Under: 401(k) Tagged With: 401(k), Fiduciary, Mutual fund, Mutual fund fees and expenses, retirement

4 Signs of a Lousy 401(k) Plan

February 6, 2013 By Roger Wohlner 20 Comments

Much has been written about the sorry state of retirement readiness in the United States. In fact the most frequently asked question that I get is Can I Retire?

For better or worse, the primary responsibility for accumulating sufficient assets for retirement has been placed upon our shoulders in the form of defined contribution retirement plans such as the 401(k), 403(b), etc. The defined benefit pension plans of our parent’s generation are rapidly fading away.

It is important that you make the most of any workplace retirement plan available to you. New required disclosures about the costs of the plan and the underlying investments were introduced in 2012 and are a good start. However, 401(k) plans are still a mystery to many of the workers who participate in them and sadly to many of the employers sponsoring these plans. Here are 4 signs that your 401(k) plan might be lousy.

Proprietary Funds

By this I mean your 401(k) plan provider or a brokerage firm affiliated with the plan offering their own mutual funds. The most extreme recent example of this is Ameriprise Financial who is being sued by a group of current and former employees for allegedly stuffing the plan offered to company employees with poor performing, high cost funds offered by Ameriprise. To boot they are also accused of taking revenue sharing payments from these funds.

While most examples are not this egregious, it should be a red flag if your plan is stuffed with funds or annuity sub-accounts from the likes of John Hancock or Principal and they also happen to be the provider of your retirement plan. There are often many incentives to be had by servicing brokers and other service providers to offer this type of line-up. While they are making money off of this type of plan, such an arrangement might be costing you big-time.

Single Fund Family Line-ups

For years the broker/registered rep community would offer a line-up filled with funds from the American Funds. These were often the best funds that they could sell and they rightly had a good name.

Just as bad is a line-up dominated by Vanguard or T. Rowe Price funds, or any other single fund family for that matter. Even though I highly respect both companies, no single fund family offers the best option in every asset class.

Expensive share classes

In many cases mutual fund companies offer a variety of share classes for use by various financial advisor channels ranging from fee-only RIAs to brokers and reps seeking compensation from selling the funds. In many cases the fund families offer several retirement plan share classes as well, again with some offering compensation to the advisor directly or to the retirement plan.

Check out the funds offered in your plan via Morningstar or elsewhere to see if there are less expensive share classes of your fund that are available. This even extends to low cost index fund providers like Vanguard who offer share classes which carry a lower expense ratio that the basic Investor share class.

A group annuity plan

This was the traditional fare for plans offered by insurance company providers. They are still around but if your employer’s plan is still in this format it is likely small in size or it has been in a group annuity for awhile.

A group annuity plan generally offers either mutual funds or annuity sub-accounts that are “wrapped” into a group annuity. These are complicated and generally expensive insurance contracts that often don’t bestow any particular benefit on the plan participants. In fact some plans carry surrender charges that make it difficult for employers to change providers.

What do I do if my 401(k) plan is lousy?

If there is a company match it often makes sense to contribute enough to receive the full match. This is free money you shouldn’t leave it on the table.
Do your homework and say something to those in charge of administering the company’s plan. This may or may not result in things changing, but many employers are more sensitive to this type of input in light of the current trends toward more disclosure and transparency.
If your plan offers a self-directed brokerage window check this option out. Understand the costs and any limitations involved. Also make sure that you are comfortable choosing your own investments or that you have an advisor to assist you.
Focus on retirement savings vehicles available outside of your plan including an IRA, maxing out a spouse’s retirement plan (if it’s better than yours), investing in a taxable account, or a low-cost annuity (ideally one with no surrender fees).
Make sure not to leave your money in this plan when you leave the company, roll it over to an IRA or to a new employer’s plan.

We are increasingly responsible for our own retirement savings. It is important that you understand how to best utilize the retirement plan offered by your employer. A good plan can be an invaluable tool in reaching your retirement savings goals. A lousy, expensive plan can cost you $1,000s in lost retirement savings and might be the difference between retiring in style or settling for less in your Golden Years.

Please feel free to contact me with your retirement planning and investing questions.

Retirement plan sponsors, do you need an independent review of your company’s plan? Do you need help selecting a new plan provider? Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees? Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) plan options and to get a free trial for their premium services. Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Update 2/27/13: It has come to my attention that a Tom Gonnella from Lincoln Trust Company has seen fit to use this post in an email to 401(k) advisors promoting their 401(k) platform. While I am flattered on the one hand, please know this was done without my knowledge or consent. I in no way, shape, or form endorse Lincoln Trust Company or its products. I will leave it to you the reader to judge the ethics of Mr. Gonnella and/or his employer in this matter. - Roger Wohlner

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Filed Under: 401(k) Tagged With: 401(k), American Funds, Ameriprise Financial, Index fund, Mutual fund, Pension, retirement

Lousy 401(k) Plan? – Strategies to Make the Best of It

December 17, 2012 By Roger Wohlner 6 Comments

Like many financial advisors I generally suggest to most clients that they maximize their contributions to their company’s retirement plan. But what if your organization’s plan is lousy? Lousy could mean poor investment choices, high expenses, or low or no company contributions.

Here are a few tips to help you make the best of a lackluster 401(k) plan:

Find the best funds in the plan

Even in the worst plans that I’ve seen there are usually a couple of funds that are decent. Consider focusing your investments in those few funds. It is always important to consider outside investments when allocating your 401(k), but in this situation its absolutely critical. You will need to allocate outside accounts such as a spouse’s retirement plan, IRAs, and brokerage accounts in harmony with your 401(k) to ensure that your overall portfolio is properly allocated. You will also need to take this total portfolio approach when rebalancing.

Consider the Self-Directed Brokerage option if offered

A number of 401(k) plans offer a self-directed brokerage window for employees who want to invest in areas beyond the basic investment menu offered. These programs vary widely and the percentage of plans offering them is relatively low. If this option is available to you make sure that you understand all of the costs and the rules associated with this program. More importantly make sure that you are comfortable managing your own investments. For those who work with a financial advisor this can be a great alternative as well, I’ve utilized these options with great success over the years with several clients.

Get the full company match

If your company matches your contributions, contribute at least enough to receive the full company match. For example, if your plan offers to match half of your salary deferrals up to 6 percent of your salary, that’s an instant 50 percent “return” on your money. That’s hard to beat. It’s also free money; don’t leave it on the table.

Focus on the overall amount that you need to save annually

Part of the financial plan that you hopefully have in place should deal with the amount that you will need to save annually to meet your retirement goals. Your 401(k) is a piece of the puzzle but there are other vehicles that might be available to you.

Contribute to an Individual Retirement Account (IRA)

Everyone with sufficient earned income can contribute $5,000 for 2012 ($6,000 if you’re age 50 or over) to an IRA. For 2013 these limits increase by $500. For traditional IRAs, the ability to deduct your contributions on your tax return will depend upon your income. Likewise, with a Roth IRA there are income ceilings that determine whether you can make a Roth contribution. With an after-tax IRA, contributions are made with after-tax dollars but all gains on the underlying investments grow tax-deferred. Good records are needed here as a portion of future withdrawals will be attributed to your contributions and will not be taxed; however a portion will also be attributed to gains in the account and will be subject to taxes.

Take advantage of other retirement savings options

If your spouse’s company offers a better plan, try to maximize your contributions to that plan first. Remember to first take full advantage of any matches offered by your company’s plan. Do you run a business on the side? If the business is generating income, consider starting a retirement plan. Among the options to consider are a SIMPLE plan, a SEP IRA, and a Solo 401(k).

Discuss your concerns with your company

Do your homework and outline your concerns with your employer’s plan. With new 401(k) disclosures that were issued to you earlier in the year you are now armed with more information about the plan, its holdings, and the underlying expenses than was available to you in the past. These disclosures have made the issue of plan expenses a key topic for many plan sponsors, your plan administrator may be more receptive to your input than you might realize. Of course, common sense and civility should prevail when bringing concerns to the company’s attention.

Need help allocating your 401(k) account or your overall investment portfolio? Please feel free to contact me.

401(k) plan sponsors, do you want an independent review of your organization’s plan? Feel free to contact me as well.

For you do-it-yourselfers, check out Morningstar.com to analyze the investment options offered in your 401(k) plan and get a free trial for their premium services.

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Filed Under: 401(k) Tagged With: 401(k), Financial plan, Individual Retirement Account

5 Timeless 401(k) Investing Tips

December 5, 2012 By Roger Wohlner 4 Comments

We have a looming Fiscal Cliff, we have infantile politicians bickering about it, and we have Jim Cramer screaming and ranting about whatever. In this environment, here are my best tips for 401(k) investors (a hint these are the same tips I would have offered if this was 2011 or 2010, or most any other year):

Stick with it

During the 2008-2009 market decline, many 401(k) participants lowered their deferral rates or stopped salary deferrals altogether. Clearly those participants who stuck with their salary deferrals and their investment strategy throughout are generally happy with the results given the market’s performance over the past three years. The point is that consistent savings and sticking with a plan plays a key role in accumulating 401(k) assets for retirement over time.

Contribute as much as you can

I’ve read many studies pertaining to retirement success. Virtually all of them cite the amount saved over one’s working life as the single biggest factor in achieving a financially successful retirement. At the very least make sure you are contributing enough to earn any match offered by your employer.

View your 401(k) as part of your overall portfolio

Far too many participants view their 401(k) accounts in a vacuum. The better approach is to treat this as a part of your overall portfolio. Your outside investments might include a spouse’s retirement plan, various IRAs, old 401(k) accounts left at former employers, taxable accounts, various individual stocks and bonds, and other investments such as rental property. The point is to view your 401(k) account in light your overall portfolio and allocate your holdings accordingly.

Don’t ignore your 401(k)

There were many stories during 2008-2009 about 401(k) participants who couldn’t bear to open their account statements. Part of the reason that the participants who stuck with their plan did so much better according to a Fidelity study was due to the fact that they bought shares at lower prices during the market decline and then benefited from the ensuing rally that started in March of 2009. As painful as it is, review your account at regular intervals and rebalance when holdings fall outside the target allocation range you have set. Even better if your plan offers automatic rebalancing, take advantage of it.

Use Target-Date Funds with caution

The concept of Target Date Funds is great. Invest in the fund with a target date closest to your projected retirement date. The manager adjusts the level of stocks as you get closer to the target date. Participants get professional management of their investments. The reality is that different funds from different families with the same target date often have widely different allocations and levels of investment risk. The quality of the underlying funds differs among various fund families. If this route seems attractive to you, it is vital that you review the Target Date Funds offered by your plan. Don’t automatically default to the fund with the target date closest to your projected retirement, rather look at the allocation of the various funds in the series and pick the one that best fits your situation. Also look under the hood at the fund’s underlying investments and be sure you understand how the fund invests your hard-earned money. This extends to all aspects of the fund including the fund’s glide path into retirement. Personally I like Target Date Funds for younger workers who might not have much in the way of outside investments; I’m not a fan for investors within 15 or so years of retirement. These folks need to have a portfolio and a financial plan that are working in harmony.

Your 401(k) can be a great retirement savings vehicle. Like any other investment, it does take work to ensure that your savings are working hard for your retirement.

Please feel free to contact me with questions about your 401(k) plan and your retirement planning needs.

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Filed Under: 401(k) Tagged With: 401(k), Financial plan, Investing, retirement, Target date fund

401(k) Options When Leaving Your Job

December 3, 2012 By Roger Wohlner 8 Comments

Perhaps you are retiring or perhaps you are moving on to another opportunity. Whatever the reason, there are many things to do when leaving a job. Don’t neglect your 401(k) plan during this process.

With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation. Here is a discussion of several and the pros and cons of each. Note this is a different issue from the decision that you may be faced with if you have a defined benefit pension plan.

Leaving your money in the old plan

I’m generally not a fan of this approach. Over the years I’ve worked with several clients who have had several 401(k) accounts that have been left with old employers. All too often these accounts are neglected and add to what I call “financial clutter,” a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to a solid menu of low cost institutional funds. In addition many of these plans tend to be among the cheapest in terms of administrative costs. If this is the case with your old employer’s plan, it might make sense to leave your account there. However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Unfortunately far too many lousy 401(k) plans are filled with high cost, underperforming investment choices and leaving your retirement dollars there may not be your best option.

Rolling your account over to an IRA

As a financial advisor I generally suggest this route to clients who are leaving their employer and for those with a collection of old 401(k) accounts still with the plans of their former employers. This not only allows for the consolidation of accounts which makes monitoring your portfolio easier, but as an advisor I often have access to a wider range of low cost investment options than might be available to them via their old employer’s plan.

Even for do it yourselfer investors, rolling over to an IRA is often a good idea for similar reasons. You will want to take stock of your overall portfolio goals in light of your financial plan and determine if the firm you are using or considering to house your investments offers appropriate choices for your needs.

Rolling your account into your new employer’s plan

If allowed by your new employer’s plan, this can be a viable option for you if you are moving to a new job. You will want to ensure that you consult with the administrator of your new employer’s plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don’t have significant outside investments. It might also be a good option if your new employer has an outstanding plan on the order of what was mentioned above.

Before going this route you will want to check out your new employer’s plan. Is the investment menu filled with solid, low cost investment options? You want to avoid moving these dollars from a solid plan at your old employer to a sub-par plan at your new company. Likewise you don’t want to move dollars from one lousy plan to another.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan. Given the potential tax consequences I generally don’t recommend this route. A few additional considerations are listed below (I mention these here to build your awareness but I am not covering them in detail here. If any of these or other situations apply to you I suggest that you consult with your financial or tax advisor for guidance.):

The money coming out of the plan is always taxable, except for any portion in a Roth 401(k) assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
You will likely be subject to a penalty if you withdraw funds prior to age 59 ½ with some exceptions such as death and disability. There is also a pretty complex method for those under age 59 ½ to withdraw funds and avoid the penalty called 72(t).
If your old plan offers a match there is likely a vesting schedule for their matching contributions. Your salary deferrals are always 100% vested (meaning you have full rights to them). Matching contributions typically become vested on a schedule such as 20% per year over five years. You will want to know where you stand with regard to vesting anyway, but if you are close to earning another year of vesting you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date. As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
Another factor that might favor rolling your old 401(k) to your new employer’s plan would be your desire to convert Traditional IRA dollars to a Roth IRA now or in the future. There could be a tax advantage to be had by doing this, however please consult with your financial advisor here for guidance tailored to your unique situation.
If you are 70 ½ or older and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company. This might also be a reason to consider rolling your old 401(k) to your new employer’s plan, again consult with your financial advisor.

There are a number of options for an old 401(k) or similar retirement account when leaving your employer. The right course of action will vary based upon your individual circumstances. The wrong answer is to ignore your this decision.

Please feel free to contact me with questions about a 401(k) rollover or about your overall financial planning needs.

Photo credit: Flickr

Filed Under: 401(k) Tagged With: 401(k), Pension, retirement, Roth IRA

Roth 401(k) vs. Traditional 401(k)

September 24, 2012 By Roger Wohlner 4 Comments

I’m excited to publish the first guest post on this blog. Joe is a personal financial blogger posting at his site www.joetaxpayer.com. Joe was kind enough to share his thoughts on choosing between a Traditional 401(k) and a Roth 401(k) if your plan allows for this option. Check out Joe’s Plutus Award winning blog for more excellent insights.

Today, let’s look at the differences between the Traditional 401(k) and the Roth 401(k). Similar to the Traditional IRA, the Traditional 401(k) permits you to make deposits to your account, pre-tax, and then, at retirement, withdraw money and pay tax upon withdrawal. The Roth 401(k) is similar to the Roth IRA, in that you make deposits with post-tax money, but will be able to withdraw both deposits and growth with no further taxes due after you retire.

Tax Planning Considerations

Seems pretty simple, no? Not so fast. It’s easy enough to look at your current marginal rate, which is the tax you pay on that last dollar of income. When you look at your total tax bill over your total income, you get an average rate which isn’t as useful for this analysis. The tougher thing is to know what your rate will be in retirement. Do you have a traditional pension from your current or former employer? How much have you already saved in pre-tax 401(k) accounts or Traditional IRAs? These are some of the factors you’ll need to consider when starting to think about whether to choose the Roth 401(k).

Let’s take a closer look at the numbers. In 2012 a couple, married filing joint, will have a standard deduction of $11,900 along with two exemptions of $3,800 each for a total $19,500 that comes off the top when calculating their taxable income. If they itemize, they may have a Schedule A showing higher than $11,900, but that’s the minimum this year. It then takes $70,700 of taxable income to hit the top of the 15% bracket (see chart above). Just over $90,000 per year gross income and still in the 15% bracket. If you are comfortable taking 4% per year withdrawal, it would take $2,250,000 in pretax accounts to fund the $90,000 per year withdrawal.

Saving your way to a higher bracket isn’t easy, nor is it so common. It can easily occur, however, with an employer whose pension is generous, or for those whose 401(k) is heavily invested in investments that have done very well. In such situations, using the Roth 401(k), funded with after tax dollars, will keep your pretax savings from snowballing out of control, potentially putting you in a higher bracket come withdrawal time. Even if you choose the Roth, any employer deposit remains on the traditional, pretax side.

Other Considerations

Last, it’s not just about now vs. retirement. When you change jobs you should consider rolling your 401(k) money into an IRA. During the course of your life, in any year your income is below average you should take the opportunity to convert a bit of your Traditional IRA to a Roth IRA, reporting the conversion as income, but at a lower than average bracket.

As you approach retirement, the big picture becomes more clear, and the last years before you retire can help you balance your accounts between the Traditional 401(k)/IRA and Roth flavors of these accounts. For the working couple where one spouse has retired earlier than the other, the years where a single check is coming in is the ideal time to deposit to the Roth and to convert a bit from the Traditional accounts before the larger withdrawal start to come during full retirement living.

Check out guest author Joe’s blog www.joetaxpayer.com for more great articles like this one.

Filed Under: 401(k) Tagged With: 401(k), retirement, Roth, Roth IRA, Traditional IRA

Cramer Thinks Most 401(k) Plans Stink – Do They?

August 29, 2012 By Roger Wohlner 1 Comment

CNBC’s screaming analyst Jim Cramer recently postulated on a recent show:

“However, as much as I like the tax-favored status of 401(k) plans and IRAs, I need to tell you something heretical, something almost nobody else will come out and say: Most company 401(k) plans stink,”

Is he right? I have no idea as to the percentage of lousy 401(k) plans out there, but anecdotally in my experience there are many. Two main characteristics of a bad plan are:

High fees and expenses. This includes not only the expense ratios of the mutual funds or other investment alternatives offered, but also high fees for recordkeeping and administration.
Poor investment choices.

As plan sponsors and participants receive mandated disclosures regarding plan fees and expenses, further attention is being brought to this issue. Even with these disclosures and the related publicity, many plans will continue to be sub-par.

What should you do to get the most out of your company’s retirement plan? Here are a few steps that I suggest:

Pick the best choices. Over the years I’ve worked with a number of clients with so-so or worse company retirement plans. If you have outside assets, weight your 401(k) dollars into the funds that are the best choices with less regard for their investment style. Perhaps your plan has a solid S&P 500 Index fund, a decent bond fund, and a solid International stock fund among the choices. You might consider utilizing these three funds exclusively or with most of your 401(k) dollars and using outside holdings (a spouse’s retirement plan, IRA accounts, taxable brokerage accounts, etc.) to balance out the rest of your portfolio in accordance with your overall financial plan.

Use the plan’s brokerage window if one is offered. Not all plans offer this option, but if yours does this might be a viable option for you. The choices available to you may be limited to mutual funds, but in many cases you have access to not only a full array of funds, but also individual stocks, ETFs, and more. If the menu of core choices is pretty weak this may be the way to go. Also if you are working with a financial advisor, this allows the advisor more flexibility in advising you in line with your financial plan. One caution, you may be tempted to actively trade this account because you can. This is generally a bad idea for most us.

Make sure that you contribute at least enough to earn any company match. In even the worst plan make sure you contribute enough to earn the maximum company match. For example if your employer matches 50% on the first 6% of your salary, be sure to contribute 6%. Where else are you guaranteed a 50% return on your money?

Voice your concerns to company management. Do your homework, but if you find that your plan offers mediocre or bad investment choices and the overall fees are high discuss this with the appropriate people within your organization. As with anything else, common sense needs to prevail here. Don’t be adversarial, but rather offer constructive suggestions and voice your concerns about being able to accumulate a sufficient retirement nest egg. A better plan for the participants doesn’t necessarily mean higher costs for the sponsor. Many plan sponsors just aren’t aware of the better alternatives in terms of providers available to them. I have found that most sponsors do care about their employees and want to help them save for retirement. This benefits the organization as well as the employees.

Do many 401(k) plans stink? The answer is clearly yes. However they are the best retirement savings vehicles available to many American workers, so be sure to use yours to your best advantage.

Please feel free to contact me with questions regarding your 401(k) plan or about your retirement planning needs.

Photo credit: Wikipedia

Filed Under: 401(k) Tagged With: 401(k), Asset allocation, Individual Retirement Account, Jim Cramer, Pension, retirement

You distrust Wall Street but you trust the housing market? Really?

Are you getting in too late?

Are you smarter than the professional investors?

Understand the potential costs and risks

Look before you leap

The GAO Study

Leaving your balance with the old plan

Rolling over to a new employer’s plan

Rolling to an IRA

What do I do now with my 401(k) now?

Review and Rebalance

Review your 401(k) account as part of your overall portfolio

Take the long view

What does this mean to you as a 401(k) participant?

What does this mean to organizations that sponsor 401(k) plans?

Proprietary Funds

Single Fund Family Line-ups

Expensive share classes

A group annuity plan

Find the best funds in the plan

Consider the Self-Directed Brokerage option if offered

Get the full company match

Focus on the overall amount that you need to save annually

Contribute to an Individual Retirement Account (IRA)

Take advantage of other retirement savings options

Discuss your concerns with your company

Stick with it

Contribute as much as you can

View your 401(k) as part of your overall portfolio

Don’t ignore your 401(k)

Use Target-Date Funds with caution

Leaving your money in the old plan

Rolling your account over to an IRA

Rolling your account into your new employer’s plan

Other considerations

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