Adding Up the 401(k) Savings

Much of the discussion around retirements is rightfully focused on the large numbers of people who are not saving enough. But The Washington Post recently shared some positive information:

The number of workers with $1 million or more in their 401(k) increased to 157,000 at the end of the first quarter this year, an increase of 45 percent compared with the same time a year earlier, according to Fidelity Investments, one of the country’s largest administrators of workplace retirement accounts.

“There’s no doubt that many of Fidelity’s 401(k) millionaires have benefited from the market’s positive performance, but they also exhibit many of the behaviors we recommend to make the most of your savings,” said Jeanne Thompson, senior vice president for Fidelity. “They contribute enough to get their full company match, they’re less likely to take 401(k) loans, they don’t cash out when changing jobs and they invest for growth — on average, 401(k) millionaires hold 76 percent of their savings in equity mutual funds.”

Workers can now contribute up to $18,500 each year to a workplace plan such as a 401(k) or the federal government’s Thrift Savings Plan (TSP). If you’re over 50, there’s a catch-up provision that allows you to contribute up to $24,000 to an employer-sponsored retirement plan.

Fidelity’s analysis of first quarter data also found the following.

  • Workers who have saved in their company’s 401(k) for 10 years had a record high average account balance of $290,100, compared with $250,500 a year ago.
  • Those employees who have saved for 15 years had an average balance of $379,600, up from $330,200 a year ago.

“Although found at many grade levels and in nearly every agency throughout the country, all of the people in the million-plus column have the same things in common: they have invested for the long haul, and invested heavily or exclusively in the stock-indexed C and S funds,” Mike Causey of Federal News Radio wrote. “When markets drop dramatically — as they did in 1997 and during the Great Recession — they continue to purchase stocks getting more shares each pay period because they are investing the same amount of money, which purchases a larger share of the C and S funds. Also, all of those eligible for it have taken advantage of the total 5 percent match available from their agency.”

Protecting the 401(k) Plan Sponsor

Money safety concept

According to Groom Law Group, since 2007 there have been nearly 40 lawsuits about fees and expenses paid by employees in 401(k) plans. Of the 40 fee and expense lawsuits filed since 2007, a few have actually been adjudicated through the courts, some have been dismissed and several have been settled out of court. For the lawsuits that have been settled or adjudicated, the amounts have been in the tens of millions, not to mention the legal fees that are incurred.

What should companies do?

Below are items that we believe are prudent processes that plan sponsors should follow:

  1. There should be a clear governance structure that delineates who appoints retirement plan committee members and also a process to monitor the plan’s fiduciary committee.
  2. Fiduciaries should look, at least annually, for lower cost investment options for the plan. The same investment option may have several ways it can charge fees which come with different requirements that can change over time. This makes the process of conducting a regular review so very important.
  3. A review of service providers on a regular basis helps keep costs and services in line with industry changes.
    a. Service provider fees should be benchmarked on a regular basis.
    b. Requests for Proposals should be conducted at least every five years to make sure that fees and services are in line with industry standards.
    c. Service providers should be skilled and have adequate experience in providing the needed services.
    d. Service providers would include (but are not limited to) record keepers, advisors, trustees, custodians, and plan auditors.
  4. A regular review of the investment options and categories offered to participants should be conducted.

A 401(k) plan is a great vehicle to help employees prepare for retirement and, for most employees, it is one of the only vehicles available to them (other than social security). In my opinion, the 401(k) is one of the most successful wealth accumulation vehicles created in history. Americans have accumulated trillions of dollars toward retirement simply by taking money from their paychecks on a regular basis and putting it away for their retirement years.

Douglas G. Prince is CEO and a principal at ProCourse Fiduciary Advisors, LLC.

Six Tips that Make Good ‘Cents’

19151085What do you mean money doesn’t grow on trees? Rats.

Now that we’ve got that nasty truth out of the way, it’s time to get serious. It’s time to start saving.

This Forbes article describes six easy ways people in their thirties can do just that – and how it will pay off in the long run.

Three of the tips include:

  • Embrace stocks: The financial crisis took its toll on many thirtysomethings. Nearly 40% of Gen Y-ers say they’ll never feel okay investing in stocks, MFS Investment Management has reported. Take note: Since 1926, a portfolio mostly in stocks has never lost money in any 20-year period while averaging gains of more than 10.8% a year, versus 4% for bonds. At age 30, you should have most of your portfolio in stocks, with about half in U.S. equities and nearly 30% in foreign equity.
  • Don’t cash out: More than half of workers in their twenties who leave a job do not roll their 401(k) into an IRA or their new employer’s plan, says Aon Hewitt. Bad move: On a $10,000 balance, you could be left with just $7,000 after taxes and penalties. If, instead, you keep that money growing at, say, 6% a year, you’ll have an extra $100,000 or so by the time you retire.
  • Sweat the small stuff: If you carry multiple credit card balances, you’ll save the most money by paying off your highest-rate plastic first, right? Wrong. Two Northwestern University professors have found that people who focus on their smallest debts before tackling bigger, higher-rate loans are more successful at erasing debt. The psychological boost from eliminating a loan entirely gives you the mojo to keep paying down debt.

Breaking Down the Pension Puzzle

I’ll summarize pensions in three short phrases: needed (in some form) to help prepare for retirement, difficult to understand and maybe even more difficult to write about.

I give it a shot in the upcoming BizVoice (available online on Feb. 28 and in the mail that same day) with the help of some really smart state and national experts. A couple of takeaways:

  • Indiana’s public pension system is in better shape than most, thanks to some long-term innovative and common sense practices
  • Traditional defined benefit plans in the private sector have largely given way to defined contribution programs (think 401{k})
  • There remain big (really big) concerns over whether Hoosiers and Americans are saving enough

Check out the numbers and the analysis in the March-April issue of BizVoice.