Entries in 401(k) (7)


‘Fiscal Cliff’ Standoff Weighs on Stocks, 401(k)s

Mario Tama/Getty Images(NEW YORK) -- Investors don't like uncertainty, and Washington’s game of cat and mouse on the so-called "fiscal cliff" of tax hikes and spending cuts has erased hundreds of billions of dollars of wealth from Americans.

If a deal is not reached, the consequences for the economy will be severe, wiping out as many as 5 percentage points of Gross Domestic Product in the coming year, according to some estimates.  Though economists argue about the impact of the numbers -- the $1.2 trillion in spending cuts would happen over 10 years -- nearly all agree the combined effect would be recessionary.

The Dow Jones Industrial Average has lost 400 points since the “cliff” talks began in earnest in mid-December.  That wiped out nearly half the gains in the index for the year, which, as of mid-morning Monday, was up 5.9 percent for 2012.  It’s a blow to investors and 401(k) savers who, since 2008, have seen only about 2 percentage points added to their wealth with the stock market’s gyrations.

It’s easier to gauge the “fiscal cliff” effect on the financial markets, but what’s less apparent -- though equally significant -- is the impact on non-publicly traded companies, says Sageworks CEO Brian Hamilton.

“There are 27 million private companies out there, and they’re watching the cliff negotiations closely,” he told ABC News on Monday.  “This uncertainty is weighing heavily on business owners.  You can’t throw policy at them on the last day of the year and expect them to adapt and plan for their businesses."

“They’re uncertain and they should be; they need some time to prepare for what’s coming at them.  If it’s a great policy, that’s fantastic.  However, any policy is better than the uncertainty they’re facing right now,” Hamilton said.

Perhaps the most discouraging aspect of the “cliff” talks is that even under the rosiest scenario, any deal worked out to avoid it will do little to solve the nation’s budget and debt morass, built dollar by dollar in three decades by politicians in both parties.  The budget deficit has topped $1 trillion four years in a row -- a shortfall higher as a percentage of GDP than any year since World War II.

Meanwhile, the national debt has ballooned to more than $16 trillion.

No deal being contemplated would even bring the budget into balance until nearly the end of the decade, nor would it envision cutting the national debt by even a dollar.  Instead, the debt will continue to rise.  

President Obama needs authority to raise the debt ceiling or face drastic cutbacks, starting as soon as Monday.  Treasury Secretary Tim Geithner told Congress last week that the government would hit its $16.4 trillion borrowing limit on Dec. 31.

The government will be able to move money around between its accounts to stave off a crisis but only for a month or two.  It’s not clear then what would happen if the debt ceiling is not increased.

Bill Gross, at Pacific Investment Management Co., manager of the world’s biggest bond fund, tweeted on Monday that he expects stocks and bonds to return less than 5 percent in 2013 as high unemployment persists.

“There may be no miracle policy drugs this time around to provide the inevitable cures of prior decades,” Gross wrote in his December market commentary on Pimco’s website.  “These structural headwinds cannot just be wished away.”

Even if there’s a deal, the economy is in for headwinds next year.  A 2 percentage point jump in payroll taxes for Social Security will take place on Jan. 1, sucking about $2,000 from a worker earning $100,000 a year.  Higher taxes on the wealthy -- a given in any version of a budget deal -- will draw money out of the economy, cutting job creation.

Economists expect that even with a deal, GDP will rise at a 2 percent rate in 2013 -- not enough to make a dent in the jobless rate, which has remained near or above 8 percent since 2009.

Copyright 2012 ABC News Radio


401(k) Fees May Cut 30 Percent from Retirement Balance

iStockphoto/Thinkstock(NEW YORK) -- American workers who don’t think twice about their employer-sponsored 401(k) plans may be surprised to learn that fees can cut their retirement savings by 30 percent over a lifetime.

A household with two people earning the median income of their age group from 25 to 65 will pay an average of $154,794 in 401(k) fees and lost returns, according to a report from progressive, non-partisan public policy research group Demos, based in New York.

The $154,794 is 30.3 percent of that household’s retirement balance of $509,644 that is lost to fees.

The median 401(k) balance was a scant $23,000 at the end of the first quarter this year among Fidelity Investments’ 11.8 million accounts.

The higher your income, the greater the absolute value you pay in fees.

A dual-earning household in which each partner earns an income greater than three-quarters of Americans each year over their lifetime can expect to pay as much as $277,969.

Robert Hiltonsmith, policy analyst at Demos, said the most surprising finding was how much of a retirement balance can be lost to fees.

“I knew it was going to be a lot. I didn’t realize it was going to be more than 30 percent of what your retirement nest egg would have been,” he said.

The mutual fund industry provides a different picture.

The Investment Company Institute, a fund industry trade group, said the average person pays $248 a year in 401(k) fees, according to a study last year. The Los Angeles Times reports that would cost the average dual-income household under $20,000 while working over four decades.

But Hiltonsmith said the institute does not take into account trading fees, which represent nearly half of fees paid in Demos’ calculations.

Second, the household in our model is able to make consistent -- and increasing -- contributions each year, and never withdraws or cashes out their balance due to a life trauma or shock, Hiltonsmith said.

“Most households, however, don’t have the economic or job security for this to be the case, and aren’t able to do one or both of these things,” he said.

Hiltonsmith said the institute uses the median retirement balance, which is low because of the economic realities faced by most households trying to save for retirement.

The 30.3 percent figure that Demos discovered doesn’t vary based on household contributions or balances.

“And that percentage bite is, I think, the number to focus on,” Hiltonsmith said.

Workers with 401(k) funds can act to minimize the fees for their accounts in at least three steps:

1. Workers should learn what their fund’s expense-ratio is.

An expense ratio is a mutual fund’s fixed costs, such as administrative and marketing fees divided by the total assets of the mutual fund.

In the 401(k) funds available to Demos employees, the expense-ratios range from 0.70 to 1.3.

You can find most fund’s expense-ratios and compare funds on sites like and  Starting July 1, 401(k) providers will be required to disclose fees and expenses according to a rule first approved by the Employee Benefits Security Administration’s rule in October 2010.

Higher fees do not guarantee a higher return.

2. You can ask a financial advisor about shifting their money into lower-cost funds.

Actively-traded funds, which aim to maximize returns by rapidly buying and selling assets, incur much higher trading costs than passive funds, such as index funds. The latter invests in a set diversified portfolio or in a fixed mix of assets.

3. Workers can ask their employer about having lower-cost 401(k) options available or switching providers.

Elisabeth Leamy, ABC News’ consumer correspondent, said that if banding together with your co-workers and pushing for better choices still fails, workers should make the minimum contribution to get the company match and put the rest of your savings into a low-fee IRA.

“I think the major point that we want a lot of people to take away from this is that these high fees in the system are part of the greater shifting of retirement risks and costs that have happened in the past 30 years,” Hiltonsmith said. “They shifted from the shared responsibility of employers and employees to solely on the backs of employees.”

Hiltonsmith said 401(k) funds should not be the primary place to supplement a worker’s Social Security benefits.

“The system isn’t suitable to be the main place for workers to save for retirement,” he said of 401(k) funds. “It’s not safe and it’s not low cost.”

Copyright 2012 ABC News Radio


How Elections in France, Greece Can Affect Your 401(k)

Photodisc/Thinkstock(NEW YORK) -- Voters in Greece and France went to the polls and sent the same message, punishing leaders who pushed through austerity plans -- drastic cuts aimed at saving Europe's economy.  

Why should the U.S. care about rejected austerity measures in Europe?  Economists say it could have an effect on your 401(k).  

Much of Greece's debt, for example, is financed by the major French banks.  The French banks are insured by American banks.  So if the banking system in Europe cracks, says Art Cashin of UBS Financial Services, 401(k)s in the U.S. will be dragged down with it.

"Money flows like water and if a dam breaks someplace, that could flood your home," Cashin told ABC News.

But the results of the rejection of these austerity plans may not be all bad.  According to a Wall Street Journal report, some analysts say voters' rejection of austerity in France and Greece could boost the global economy if governments feel pushed to do more in stimulating economic growth, rather than enforce stiff budget cuts.

Copyright 2012 ABC News Radio


Will 401(k) Fee Disclosures Bring Clarity to Perplexed Workers?

Photodisc/Thinkstock(NEW York) --  Is your 401(k) account loaded with high, hidden fees? New federal 401(k) plan disclosure rules will soon be implemented to highlight how much fees are eating into employer-sponsored retirement accounts.

But more workers are already going after companies that they allege are taking advantage of those retirement accounts. Ameriprise Financial Inc. employees participating in the company's 401(k) plan filed a suit last month against the company, alleging the financial services firm invested employee retirement money into its own untested funds and charged expensive, uncapped fees.

Several employees filed a suit in a Minnesota district court on Sept. 28, seeking class-action status for all employees participating in Ameriprise's 401(k) plan, established in October 2005. The basis of the suit is the Employee Retirement Income Security Act of 1974 (ERISA), which directs employers to exercise fiduciary duties "solely in the interest of the participants and beneficiaries ... defraying reasonable expenses of administering the plan."

Jerome Schlichter, attorney for the Ameriprise employees, said they are accusing Ameriprise of self-dealing and breach of fiduciary duties.

Schlicter said the suit potentially applies to tens of thousands of employees if it is granted class-action status.

Ameriprise did not return a request for comment.

While many 401(k) plans charge employees flat administrative fees, such as $25 per participant per year, Schlicter said Ameriprise employees were charged an uncapped record-keeping fee that increased relative to asset value.

Schlichter also represented employees in similar suits filed in 2006 against construction company Bechtel, machinery company Caterpillar and contractor General Dynamics. Caterpillar and General Dynamics settled last year while Bechtel settled this year.

Michelle Michael, Bechtel's corporate communications, told ABC News in an emailed statement: "While we maintain we complied with the Employee Retirement Income Security Act of 1974 (ERISA), we believe the settlement of the long-standing litigation was a desirable outcome for everyone involved."

Caterpillar and General Dynamics Corp. did not return a request for comment.

Some of the hidden fees will come to light starting next summer, when the Labor Department's Employee Benefits Security Administration's rule approved last October takes effect. That rule requires 401(k) providers to disclose fees and expenses to improve transparency to workers.

The final rule will become applicable to covered individual account plans for plan years beginning Nov. 1. For calendar year plans, compliance will be required on Jan. 1. Workers should begin to see greater fee disclosure this summer.

Experts offered tips to ABC News on how to ask the right questions to your employers and plan providers regarding how much value you really receive from your 401(k) plan.

Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and personal finance, said he is a "strong proponent" of full disclosure of fees and transparency in 401(k)s.

"However, at the end of the day it remains a question of what you get for the fee paid rather than just how much the fee is," Schwartz said. "If you receive a fund that does a good job of managing risk in a difficult environment, that is certainly worth a higher fee than a fund that merely provides a return that is highly correlated to an index and offers no protections against a steep decline in that index."

Russel Kinnel, Morningstar's director of mutual fund research, said employees should determine their plan's expense ratio and fee level. Fund participants can view Morningstar's ratings for a fund and its performance history on if the fund is public and has a ticker symbol. The site provides an expense ratio and fee level for the fund relative to its peer group. The fee level ranges among: low, below average, average, above average, and high. The funds also have a star rating, which Kinnel says are not opinions or analysis but rather just a quantitative measure of past adjusted risk and returns.

Kinnel said employees can ask employers if they offer target date funds, which are growing in popularity. Those funds adjusts your asset mix over time, so less risky assets, such as bonds, comprise most of the fund closer to your target retirement date.

Mike Alfred, co-founder and CEO of financial information company BrightScope, said target-date funds are a "standard offer" and were originally created for 401(k) funds. Though Alfred said it is best to have a diverse portfolio instead of worrying about individual funds.

People can got to BrightScope's website to check if their employer's 401(k) plan has a BrightScope rating. The rating takes into account company contributions, fees, investment menu quality, vesting schedules, eligibility periods and other criteria, from data filed Dec. 31, 2009.

Alfred said the imminent 401(k) regulation is a good step forward in transparency, but the disclosures are still lacking because they do not require providers to provide context and comparison for fees.

"There will be varying degrees of compliance with any regulation," he said. "It will be interesting to watch next year."

Copyright 2011 ABC News Radio


How the Stock, Bond Market Slide May Affect Your 401(k)

Hemera/Photodisc/Thinkstock(NEW YORK) -- With the Dow posting its worst two-day decline since 2008 this week, near-retirees with 401(k) accounts may worry about losing the gains of the market’s rebound over the past two years.

Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and personal finance columnist, said it’s especially important to stick to your retirement plan during moments of fear.

“The most important factor about 401(k)s is your time horizon,” Schwartz said. Hopefully, if you are planning to retire next year, your portfolio had little exposure to high-risk stocks.

“If you have a 10- to 20-year horizon, and you are investing monthly, yesterday was a non-event,” Schwartz said, referring to the nearly 400-point drop in the Dow Jones industrial average.

An investor’s time horizon is also relevant for 401(k)s that contain U.S. Treasury bonds. The 10-year treasury hit a record low yield of 1.67 percent earlier Friday.

“Treasuries are lower-risk investments, but on the downside with these yields they’re going to have trouble keeping up with inflation,” he said.

The impulse may be to sell stocks and bonds, but Schwartz said making decisions out of fear is not the way to steer your investments.

“What you want is a clear course and a portfolio you can live with and I think you ride through yesterday,” he said.

At the simplest level, younger investors should increase the risk in their portfolios when stocks are cheaper, but Schwartz said “we may not have hit bottom yet.”

He said “quality stocks” are likely to perform well over a longer period of time from this point.

“So maybe it’s a time to look at enough high-quality companies in which you have faith they’re going to do okay,” he said.

Copyright 2011 ABC News Radio


What the Deficit Fight Means for You

Comstock/Thinkstock(WASHINGTON) -- If Congress fails to raise the U.S. debt ceiling, what will be the consequences for U.S. savers and investors? Economists at the Center for American Progress, a progressive advocacy group, believe the consequences could be dire.

The stock market, they say, could drop by 20 percent to 30 percent. And 401(k)s, which in the past two years have rebounded from losses suffered earlier in the recession, could see those gains largely erased.

On Wednesday, Wall Street issued Washington an ominous warning when Moody's said it would put the United States on review for a downgrade if there is not substantial progress on a debt deal by mid-July.

Gloria Moss, 65, an educator in Florida, lost about half the value of her 401(k) in 2008, when the economy turned sour and the stock market fell. By this May, thanks to a stronger market and the help of a financial planner, she had recovered about 75 percent of what she'd lost.

A report by financial services company Fidelity Investments found that by the end of the first quarter, the average 401(k) balance had surged past where it was before the recession. It's exactly these gains, say the economists, that are in jeopardy if the nation's debt ceiling isn't raised.

Sixty million Americans have a 401(k)-type plan totaling $4.7 trillion, or about $74,000 per account. ABC News spoke with 11 financial analysts at the country's biggest investment companies. All the analysts said it's a good time for people to watch their portfolios carefully, but too early to make any moves.

A blow to the stock market would be felt most painfully by baby boomers of retirement age, since this generation, unlike previous ones, is more dependent on market-sensitive 401(k) savings than on fixed pensions.

Given that almost 60 percent of 401(k) money is invested in stocks, says Center for American Progress economist Christian Weller, a 20 percent market drop would cost the average saver $7,911; a 30 percent drop would cost almost $12,000.

Copyright 2011 ABC News Radio


How Would Failure to Raise Debt Ceiling Affect 401(k)s?

Photodisc/Thinkstock(WASHINGTON) -- If Congress fails to raise the U.S. debt ceiling, what will be the consequences for U.S. savers and investors?

Two economists at the Center for American Progress, a progressive advocacy group, believe the consequences could be dire. The stock market, they say, could drop by 20 percent to 30 percent. And 401(k)s, which in the past two years have rebounded from losses suffered earlier in the recession, could see those gains largely erased.

A report by financial services company Fidelity Investments found that by the end of the first quarter, the average 401(k) balance had surged past where it had been before the recession.  It's exactly these gains, said the two economists, that are in jeopardy if the nation's debt ceiling isn't raised.

Heather Boushey and Christian Weller expressed their views, respectively, in testimony before Congress in July and in a May white paper.

Boushey predicts that allowing the economy to "slam into the debt ceiling will undoubtedly create an immediate economic shock," with disastrous consequences for the job market.  Government, unable to borrow, would need to reduce spending immediately by 40 percent.  The same shock, she believes, would trigger a sharp fall in the stock market.

"Families with 401(k)s would likely lose all the gains they have made in 2010 and much of their gains in 2009, moving them further below where they were at the end of 2007 after the stock market fell sharply," she said.

The blow would be felt most painfully by baby boomers of retirement age, since this generation, unlike previous ones, is more dependent on market-sensitive 401(k) savings than on fixed pensions.

The hit to 401(k)s, coupled with what she said would be a further decline in home prices, will deal the middle-class a double whammy.  Near record-breaking unemployment rates would make it difficult for older, unemployed boomers to work their way out of their retirement hole.

Of the ongoing struggle in Congress over what to do about the debt ceiling, Boushey's colleague Weller wrote: "What may seem like an esoteric debate far removed from people's lives could in the end become a major setback for families' economic security."

Given that almost 60 percent of 401(k) money, he said, is invested in stocks, a 20 percent market drop would cost the average saver $7,911; a 30 percent drop would cost almost $12,000.

How much any individual's 401(k) would be affected by a market drop would depend, of course, on how the money had been invested.

Copyright 2011 ABC News Radio

ABC News Radio