Your Money In The News:? Great Investment advice for the beginning investor, Use your tax return to increase your credit score, What to do with your 401(k) when you leave your employer, How to get the best auto loan…
While it?s ?common knowledge that the earlier you start investing for your future the better, you need to make sure that your money isn?t being wasted elsewhere before you start socking your extra change away. This in depth article by The Fool gives you investment advice to guide you from zero to hero on your journey to financial success. An overview:
Get rid of high-interest debt first
If you have consumer debt you are probably paying more in interest than you could earn investing. Math doesn?t lie. If you do not pay attention to your interest rates, you could lose money investing instead of paying down your credit card debt first.
Prepare for the unexpected before you invest
The majority of Americans can’t cover a $1,000 unexpected expense without going into debt or selling something. If you have all of your money locked into investments and something unexpected happens, you will have to sell your investments or go into debt to cover an emergency. While experts often quote 3-6 months, if you are starting from zero, pick an attainable goal like $1,000 before you start thinking about investing.
One exception to these rules:
If your company has a 401(k), 403(b), or similar retirement plan, and your employer matches contributions, definitely take advantage whether or not you have credit card debt or savings. An employer match is free money. Don?t turn it down.
Understand your investment goals
Before you invest you’ll want to get a clear picture of your primary goals. Whether you are investing for retirement, or for your children’s college tuition, you need to consider both your risk tolerance and investment time period in order to pick the correct investment vehicles for your situation.
Know how asset allocation works
Another important step before you start investing is to understand what to invest in. Learn the difference between stocks (equities) and bonds (fixed income) and so that you can make educated decisions.
Start with easy-to-understand investments
If you’re completely new to investing, it’s generally a smart idea to keep your investments broad and easy to understand. There are many mutual funds or ETFs that can make it easy for you in the beginning. Investing in stock index funds and bond index funds can help get you started while you learn more about investing.
Stocks require more knowledge
Investing in stocks can be quite lucrative if you do it right, but you need the time to research stocks and the knowledge to research them correctly. Learn all you can before you invest. Motley Fool recommends these two books for beginning investors.
- The Intelligent Investor by Benjamin Graham:
- One Up on Wall Street by Peter Lynch
Don’t let lack of capital get in your way
Don?t assume that because you don?t have much to invest that you should wait. There are many opportunities to invest today even if you can only afford $50 per month.
If you’re in a solid financial position, with little or no credit card debt and a reasonable emergency fund, now is the best time to start. Time is your best friend as an investor — even if you don’t have much to invest.
According to the IRS, more than 70% of taxpayers received refunds in 2017 and the average refund was around $2,895. Instead of blowing your refund as if it were free money (it?s not, you paid it remember?), why not use it to leverage a better financial future? Increasing your credit score will serve you in more ways than you think.?Your credit score is not only a deciding factor in your ability to secure loans at better interest rates, it can also affect your ability to rent an apartment, and more recently is even used as a character reference for employment.
Pay off delinquent accounts or late payments
Your payment history affects your credit in a major way, accounting for 35% of your FICO score. Delinquent accounts can remain on your credit report for 7 years.?If you have any overdue bills or anything that has gone to collections, get rid of them first.
Pay down your credit cards
Your credit utilization score makes up 30% of your FICO score.?The goal is to keep is to keep your debt-to-credit ratio below 30%. For example, if you have $10,000 in available credit, you don?t want to owe more than $3,000. The best investment you can make for your future is to eliminate your consumer debt. You will pay far more in interest on your credit cards than you will ever make investing.
Ramp up your student loan repayment
44 million Americans are dealing with student loans. The faster you pay off your student loans, the less you will pay in interest. Not only will you save money on interest, but reducing your debt and making on-time payments can increase your credit score.
Build your credit score with a? credit card
Unfortunately we need a credit card in order to build credit. It?s sort of a Catch 22. But if you have a weak credit score, how can you get a credit card?
A secured credit card has you put down a deposit to back up your line of credit. If you make payments on time, your credit score will increase. Eventually, it will be strong enough to qualify for an unsecured credit card. Also, using a secured credit card can help get you in the habit of paying off your credit card balance in full every month.
Save your refund to cover future debt or expenses
If you have paid down your consumer debt, it?s time to allocate money to an emergency saving fund. While this won?t affect your credit directly, it can help keep you out of debt. By using savings instead of a credit card or personal loan you will avoid high-interest debt that could drag down your credit score.
High interest rates on new vehicle loans last month reflected levels not seen since 2009. With more Fed interest rate hikes expected, unless automakers lower their prices, it is going to get more and more expensive to purchase a car. What can you do?
Clean up credit report errors
If you have errors on your credit report, they may be affecting your credit score. You are entitled to one free copy of your credit report every year. Get a copy of your credit report and make sure that the information on that report belongs to you and is correct. Credit report errors are more common than you may think. The FTC reports that roughly 1 in 5 people have errors on their credit report. ?The Consumer Financial Protection Bureau can guide you in making sure that what is reported is correct.
Put down larger down payments
A higher down payment means you may have lower monthly payment.?According to Edmunds, the ideal downpayment is about 20%. Not only will a larger down payment save you money in interest, it will also protect you from depreciation. If you only put down a small down payment, you will have “negative equity” which means you will owe more than the car is worth over time.
The biggest lenders like Bank of America, Chase, or Wells Fargo, aren?t the only place to obtain an auto loan. Deals can be found from ?captive? finance companies belonging to automakers, including Ford Motor Credit and Toyota Financial Services. And there are also credit unions, local banks, and online banks. Do research on the different auto lenders, and come prepared with questions. It?s important to know what you?re getting into when taking on an auto loan.
Are you about to leave your employer? Are you keeping your money in the retirement plan, or are you taking your savings with you?
401(k) plan managers have a history of contacting leaving employees about rolling over their balances into an IRA with them, and this isn?t always a good idea. It?s possible that you will end up with an expense ratio that increases from below 1% to 2-3%.
For example, just last month Wells Fargo got caught with its pants down again, as the U.S. Labor Department is reportedly looking into Wells Fargo’s 401(k) practices?and whether the bank is pushing its customers into more expensive plans.
So, you need to be careful. If you are leaving your employer and you have a 401(k) with them, here?s what you should know if you are contacted by the 401(k) plan record-keeper about an IRA rollover.
Keep in mind that a recent Labor Department rule which required advisors and brokers to put their clients’ interests before their own when advising on retirement accounts such as 401(k) plans and individual retirement accounts is no longer being enforced. This means that you need to be very wary about the advice your financial advisor gives you as it may not be in your best interest.
The way a representative from a 401(k) plan presents the question of “stay or go?” can nudge the employee into a course of action. For example, they may ask if you value low-cost investments with guidance to keep you in the 401(k). Or they may ask if you prefer a broader range of investment funds which would be available with a potentially more expensive IRA.
Before you roll over into whatever plan your financial advisor suggests, here are some important points to consider:
- Compare your costs: Find out how costs compare between your 401(k) and an IRA. Do not assume the 401(k) has the correct information. Double check everything.
- Learn about your in-plan options: If you stay in the plan, will you be able to draw down from your funds through retirement? If so, find out whether there are fees for transferring your savings to your checking account.
- Think about how to invest your savings in the long run: Even if you leave your money in the plan through retirement, decide how you want to allocate your funds to protect your principal. Plan sponsors cannot answer that question for you. It’s a personal decision.
This month:? Would you trade your Social Security payments of tomorrow for student loan debt relief today? – The Student Security Act,? 9 tips to lower investment taxes, How will Federal interest rate hikes affect us in practice? Is there a holistic solution to the 401(k)? and more…
Student Security Act:? Would You Trade Your Retirement Benefits for Student Loan Debt Relief? – Detroit Free Press
What if you could trade your future Social Security retirement payments for student loan payments today?
Would you do it?
In a survey of 943 student debtors conducted by LendEDU, 46.3% said they’d be willing to delay their retirement age 22 months, in exchange for $12,000 off their student debt. And more than 30% said they’d trade any amount of retirement deferral time required to wipe out 100% of their debt.
In 2016, Social Security projected that it would run out of funds in less than 20 years if something isn?t done.
This doesn?t give millenials a very bright picture of their future in terms of retirement. Couple this with the fact that 5 million Americans are currently in default on their student loans, with the default rate expected to approach 40% by 2023, and trading Social Security benefits for student loan relief doesn?t seem like such a bad idea.
Enter U.S. Rep. Tom Garrett?s proposal?H.R.1937 – Student Security Act of 2017.
The Student Security Act would allow student loan borrowers to knock $550 off their outstanding principal for every month they agreed to postpone their retirement, thus delaying their eligibility for Social Security benefits. Garrett says the Social Security Administration estimates that his proposal would save it $725 billion over the next 75 years ? in addition to whatever reduction in stress-related illnesses resulted from relieving tens of millions of students of their massive student debt obligations.
While it seems risky to to borrow from your ?future self? over the long run, is it any surprise? Isn’t that the same posture our elected representatives in Washington have adopted toward practically every fiscal challenge they confront?
What happens when an entire generation, many of whose members have worked hard all their lives, suddenly have little to show for it at retirement age?
While the move from company pension plans to employee directed contribution plans (401k) in the 1980?s may have helped companies better meet their quarterly financial targets, it has placed an unmanageable burden on employees.
As a result, the retirement situation has changed dramatically for American workers. Baby Boomers and Gen Xers are currently at risk of not having enough to maintain basic living standards at retirement. And this risk is intensified explicitly by the insanity of rising health care costs in our country.
The problem with 401(k)s:
- 401ks earn less on average due to high administrative expenses and limited investment strategies.
- Employees often do not have the investing expertise to manage their own plan and therefore earn substantially lower rates of return then professionally managed plans.
- At retirement age, employees often do not have the expertise to decide how to withdraw funds, determine a spending rate, and map out a distribution or investment strategy.
We need a holistic solution.
In their book, Rescuing Retirement, authors Theresa Ghilarducci and Tony James propose such a plan. Their ?Guaranteed Retirement Account (GRA)? requires no new taxes, does not increase the deficit, and actually reduces the administrative burden on companies that sponsor plans. They believe that while business leaders should be coming up with solutions to address the burden they?ve created by pension changes, public policy must also play a role. Check out their proposition. What do you think?
Scumbag ?debt-relief? scammers are calling people in Kentucky, hustling them to pay a fee in exchange for “a promise” to lower or resolve their debt. Someone recently sent a recording of one of these calls to the Attorney General of Kentucky, who thereafter issued a warning. This particular company is calling itself ?Financial Planning Card Services,? and in the recording, it claims to be able to negotiate your interest rate on your credit cards with any major bank to as low as ?.wait for it?.%0.0. For a fee, of course.
The FTC prohibits for-profit companies that sell debt relief services over the phone from charging a fee before they actually settle or reduce a consumer?s debt. And this is because they usually do not settle or reduce a consumer?s debt. In fact, if they do nothing at all, it may be better as they usually make things worse.
The FTC has brought scores of law enforcement actions against these bogus credit-related services and even has a list of Credit and Debt Repair Scams press releases describing them. But it doesn?t stop them from happening. Ranging from credit card, student loan, mortgage and auto loan modification schemes, desperate consumers continue to get duped again and again. Don?t fall prey to these scams.?
If you are looking to buy a house, borrow money for college, or are trying to pay down credit card debt, an increase in interest rates will affect you directly. This in-depth article tells you how, and what you can do to try and ease the pain. Some takeaways:
Rates on credit card debt are typically tied to indexes that track the Fed?s moves closely. One option for borrowers whose rates increase is to consolidate their balances into a fixed rate personal loan.
While rates on federal student loans are fixed for life, rates for new borrowers are adjusted annually. So students taking out loans for this fall can expect to pay higher rates than in recent years. Rates on federal student loans to undergraduates can?t exceed 8.25 percent. The cap is 9.5 percent for graduate loans, and 10.5 percent for PLUS loans. Borrowers who do have variable rate student loans may want to look into refinancing with lenders who offer fixed-rate loans.
If the Fed keeps raising short-term interest rates, mortgage rates may follow, but not as rapidly. Fannie Mae projects that rates on 30-year fixed-rate loans will rise modestly this year and stabilize in 2019. Borrowers with variable-rate loans can lock in today?s rates by refinancing into fixed-rate loans. However, avoid stretching your finances by buying prematurely merely to lock in today?s interest rates.
Stress and debt are inextricable. But Americans alone are currently looking at a 7 year high in overdue credit card payments, and that kind of stress is palpable.
Of 1,000 debtors owing an average of $13,884, 88.6% reported stress levels directly related to their debt. What?s more, 38.7% felt their debt had stressed their relationships with friends and family.?
While over 60% believe they?ll be debt free at some point in the future, there is a fairly large chunk of people who don?t believe that they will ever be free of debt. This is bad news for lenders who will take a loss if discouraged debtors simply give up.
Should lenders become more proactive in helping people repay their debts by offering more flexible repayment options such as extending terms or reducing interest rates?
Debtors want to be debt free, lenders want to be paid. Perhaps a more cooperative relationship towards accomplishing this common goal may help Americans rid themselves both of their high stress levels, and their sense of hopelessness that they will never get out from under.
With still one week left before the 2017 tax deadline, here are some final pointers on finding tax savings in your investment tax calculations.
- Shift Toward Capital Gains ? It’s preferable from a tax perspective to have investments that rely on price appreciation for returns instead of income generation. Returns on the investments are taxed at the capital gains rate (10-20%) while returns on income generation are taxed per the standard income brackets.
- Qualified Pass-Through Income ? The recently passed Tax Cuts and Jobs Act (TCJA) allows a 20% tax deduction on qualified pass-through business income for tax years 2018 through 2025. Be sure to take advantage if this applies to your situation.
- Take Full Advantage of Retirement Accounts ? Contributions to retirement accounts are either tax-deferred or tax-free, depending on whether they are funded with pre- or post-tax dollars. Contribute up to the limit or, at the very least, contribute up to the limits of any employer-matching program. If you haven’t fulfilled your 2017 IRA limits, you have until the tax-filing deadline April 17th to make designated contributions to the 2017 tax year.
- Allocate Your Investments Wisely ? If you have a blend of accounts, allocate your investments with taxes in mind. For example, stocks that provide dividend income are better applied to a tax-advantaged account to get the maximum compounding effect and avoid taxation on the dividends as ordinary income.
- Control Emotions on Stocks ? Resist the urge to sell during market drops like the recent correction ? especially with any stocks or mutual funds that you have held for less than a year. To receive the lower capital gains tax rate on the proceeds, you must have held the stock for at least one year prior to the sale.
- Use Tax Loss Harvesting ? Are some of your stocks underperforming? By “harvesting” losing stocks and selling them off, you can offset up to $3,000 of other capital gains and/or ordinary income. If losses are greater than $3,000, you may be able to carry the excess loss forward to neutralize gains in future years.
- Choose Passive Funds ? Active fund managers must make more trades to stay ahead of the pack in returns. This increases the turnover ratio of your funds and subsequently raises your capital gains taxes. (It could also put you on the hook for more trading fees.) Passive funds are designed to track performance of a given index, and therefore they require less trading than an active account.
- Check into Health Savings Accounts (HSA) ? Assuming that you have a high-deductible health plan (HDHA) and are not enrolled in Medicare, you may contribute funds into an HSA account to pay for qualified medical expenses. The money is invested on a tax-deferred basis and withdrawals for qualified medical expenses are tax-free.
- Consider Municipal Bonds ? Municipal bonds have a “triple” tax benefit because they are one of the few investments that are exempt from all three levels of taxation on their earned interest ? federal, state, and local (assuming you are buying local bonds to gain the local exemption). They can maximize tax savings on the lower-risk investment portion of your portfolio.
- Make Charitable Stock Donations ? By donating appreciated stock to a qualified charity, you receive multiple tax benefits. You can deduct the full current market value of the stock and avoid paying capital gains taxes, regardless of the amount of appreciation.
Make sure to make the most of any tax breaks the government offers. It certainly won’t lose any sleep at night when taking your extra tax dollars should miss these opportunities to pay less.
Tags: 401(k), credit repair, debt repair companies, Federal interest rates, Money Stress, Student Loans, Student Security Act, Your Money In The News
This week’s Conscious Capitalism In The News:? Are there guns in your 401k?, Fed up with guns? – divest or engage, BofA shafts low-income customers, C-level sexual harassment damages returns, Big banks normalize crime, and more…
Jon Hale, Morningstar?s Director of Sustainable Funds, is on a roll. And he has some brilliant points. Look, if the government won?t regulate the gun market, then perhaps we need to look at the markets themselves. Hale calls on mutual fund companies to either divest from gun manufacturers or, as major shareholders, actively engage with gun manufacturers and urge them to stop standing in the way of common sense regulation.
?Mutual funds are among the largest owners of the four public companies that manufacture guns and ammunition in the U.S., including American Outdoor Brands AOBC, the firm that made the AR-15 used in the massacre of 17 high-school students last week in Parkland, Florida.?
Hale believes that mutual fund companies claiming they can?t divest because they are required to replicate a third-party index is a cop-out. He calls out Blackrock specifically, especially in light of Larry Fink?s letter to CEOs recently in which he stated:
Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the community in which they operate. – Larry Fink, Blackrock
According to Hale, Fink would agree that his advice applies to fund companies as well as the firms in which they invest.
Mutual-fund companies have a responsibility to their investors, to themselves and to society to help address the problem of gun violence, and in the process, demonstrate that they too have a ?sense of purpose. – Jon Hale, Morningstar
Vanguard is the largest institutional shareholder of American Outdoor Brands, the maker of the AR-15 assault rifle used in the Florida shooting.
A 2016 analysis of 23,000 mutual funds by MSCI found that nearly three quarters ?had some exposure to the weapons industry,? and approximately half of those funds ?had direct exposure to gun manufacturers.”
If you have a 401k, there is a good chance you are invested in the gun industry. If this bothers you, you can do something about it.
What can you do?
- Talk to your financial advisor.
- Call your mutual fund company and ask.
- Move your money to socially responsible mutual funds.
(If you have a 401k, you have more power than you think you do. Learn how to take control of your 401k.)
Wynn shares fell from $200.60 to $166.58 after a Wall Street Journal report on Jan 26th outlined a decades-long pattern of sexual misconduct by Steve Wynn.
Guess stock fell from $18.98 to $15.62 after Kate Upton?s Jan 31st #MeToo tweet about Paul Marciano, the apparel maker?s executive chairman. In a further interview with Time, Upton said she had been groped and forcibly kissed by Marciano.
Wynn has since stepped down as CEO, lessening the damage to shareholders. But this begs the question, how can publicly traded companies manage damage control as more and more sexual harassment allegations emerge?
Adam Strauss, portfolio manager of Appleseed Fund (APPLX), mentioned that indicators like governance can be a proxy for good behavior. ?If they?re taking good governance into consideration, then they can probably address harassment responsibly.?
Perhaps if good governance had been taken into consideration, they wouldn’t have found themselves in this position?to begin with.
Times have changed. Don?t start nothing, won?t be nothing.
Last month BofA announced it was no longer offering free checking accounts. Now, low-income customers must keep a minimum daily balance of $1500, or be able to direct deposit $3000 per year, in order to qualify for free checking.?
Why are the most financially vulnerable people in the US charged more to use their own money?
Americans earning less than $30,000 a year pay more pay more than three times the monthly bank fees paid by higher-income brackets, according to Bankrate.
People need to know that there are alternatives to these banking giants.
Enter Aspiration. In the wake of the conscious capitalism movement, Aspiration’s motto is ?Do Well, Do Good.?
Here is why Aspiration is different:
- Zero overdraft fees
- Free access to ATMs anywhere in the world
- Up to 100x more interest earnings than Big Banks
- 10% of what they earn goes to charity
- Enviro-friendly banking and investing
Aspiration is now offering all Bank of America customers a $12 credit if they switch to Aspiration. That credit amount represents the monthly checking fees they would pay BofA if they did not maintain the low-balance minimum.
If you got shafted by BofA, give Aspiration a look.
Last month federal authorities fined?Deutsche Bank, HSBA, and UBS a total of $46.6 million?without any of the banks having to admit guilt. They were accused of spoofing the markets. This means that they place a huge order to buy or sell a stock in order to distort the price of the stock to their benefit, and then cancel the order. The money for their fines comes from shareholders, not the individual bankers themselves.
This happens over and over again with big banks. They break the law, are fined by the government, and pay the fines with shareholder’s money, only to do it again and again.?After the financial meltdown of 2008, the government did not charge any top bankers, nor pursue corporate prosecutions for the mortgage fraud that fueled the bubble and led to the crisis.
Big banks get away with their crimes for a monetary slap on the wrist. No one is prosecuted. The settlement is sealed by the government and no one can see the details of the crime. The fines paid by shareholders are simply considered “the cost of doing business.”
Some people think that big banks are “too big to fail.” What do you think??
The Invisible Heart of The Markets: ?An Interview with ?The Father of Social Impact Investment? – Asahi Shinbun
Born in 1945 in Egypt, Ronald Cohen is chairman of the Global Steering Group on Impact Investing and serves as chairman of the British social investment bank Big Society Capital. A pioneering venture capitalist, he has been called “the father of social impact investment.”
Q: Why did you become involved in social impact investment?
If you look around at charitable organizations everywhere in the world, they share two characteristics in common: one, they have no money and, two, they have no scale. … I decided that it should be possible to do what we did for the tech revolution to respond with a new way of connecting entrepreneurs, social entrepreneurs in this case, to the capital market.
Q: But wasn’t it the case that social responsibility efforts by companies until now involved sacrificing part of their profits?
We are beginning to see the millennial generation drive the change, a new breed of young person for whom just making money is not the only goal in life…A new generation of entrepreneurs and CEOs are creating new business models where impact is at the core. The more you help to reduce carbon emissions, the more money you make. The more you help poor people to get out of debt, the more money you make. So, a new form of business model is coming up.
Q: Is it true that those involved in social impact investment have established as a goal making 2020 a major turning point for such investment?
I think what is going to help us achieve the goal is now the worldwide interest in achieving the U.N. SDGs (sustainable development goals), which have to be achieved by 2030.
Q: What do you think about the relationship between money and happiness?
I think fulfillment comes from achieving a balance between what you do for yourself and what you do for others. I think our society has gone through a period where … the purpose of business is to make money. And I think we are shifting. You know Adam Smith’s “invisible hand of markets”? I like the phrase I coined which is the “invisible heart of markets” because we bring the invisible heart of markets to guide their invisible hand.Tags: 401(k), big banks, Conscious Capitalism In The News, ESG, free checking, guns, MeToo, SDG's, sexual harassment, social impact investment, Socially Responsible Banks, Socially Responsible Investing, SRI
The 401(k) has been touted for decades as the safe place to put your money for retirement. Unfortunately, many of us have been unknowingly sold bunk products. We need to take control of our future and we need to do it now. Start by understanding exactly what you are putting your wages into, and what it is doing to your wages.
The Birth of 401(k) A Brief Overview
Before 401(k)s, many companies offered pensions. Workers were promised a secure income upon retirement.
But pensions were getting expensive from an employer?s perspective. People started living longer and maintaining them became difficult in light of new regulations and market volatility.
In 1978, the IRS added section 401(k) to the Internal Revenue Code. Section 401(k) of the The Revenue Act of 1978 enabled employees to defer paying taxes on deferred income. In other words, if you received income as cash, you?d continue to pay taxes. But if you deferred part of your income, the money could grow tax free. In 1978, the plans were called ?cash or deferred arrangements.? ?
Ted Benna, a consultant and co-owner of The Johnson Companies, a small benefits consulting firm located in suburban Philadelphia, saw an opportunity in the code and created the first 401(k) for the employees of The Johnson Companies in 1981.
By 1983, nearly half of all companies offered a 401(k).
401(k)s turned out to be cheaper for companies than pensions. ?401(k) plans essentially shifted the responsibility and payment for an employee?s retirement from the company to the employee. Instead of the company being on the hook to pay for pensions, that responsibility now fell on the employees themselves.
How were millions of Americans convinced that 401ks were better than pensions? Marketing. We were told that we?d have a lot more freedom by managing our own investment choices for retirement. Imagine that. Instead of the company guaranteeing a pension, we were now given the freedom to pay for our own retirement.
The Rise of 401(k)
This decision to shift from pensions to 401(k)s created millions of new employee investors for Wall Street and the financial industry.
However, the very idea of trillions of dollars in the hands of newbie investors opened the doors for all kinds of potential abuses within the financial industry.
The explosion of 401(k) investing coincided with their intermingling in mutual funds. The growth of 401(k) and mutual funds somewhat parallel each other. In 1990, 401k investments stood at $385 billion and were invested 9% in mutual funds. ?By 2000, nearly 50% of the 401(k) assets were invested in mutual funds.
During the bull runs of the 80?s and 90?s, when the markets were doing well, the returns on 401(k)?s seemed consistent, even invincible. So it was perhaps easy not to perceive any dangers.
Signs of Trouble for Individual Investors
The dotcom bubble of 2000 was the first warning sign that 401(k)s were putting people?s retirement plans at risk. Many took a big hit and lost their retirement savings.
Eight years later, the subprime mortgage crisis of 2008 hit retirement savers again, devastating many who not only lost their plans to retire, but also equity in their homes. The rash of bonuses handed out by bailed out banks was a slap in the face to those Americans left teetering on the financial edge.
The Problem with 401(k)
It is critical to remember that having a 401(k) is not saving for retirement. It is investing. And investing carries with it inherent risk.
?The problem with the 401K and the retirement industry, in general, is a definitional one. Saving money, or ?pure asset? accumulation is different from investing. Saving money carries little to no risk outside of the counterparty risk of the saved currency. Investing always carries risk, regardless of whether the invested asset is gold, oil, or bushels of wheat.? – ?Future Money Trends
If the quality of the mutual funds in a 401(k) plan is poor or even mediocre, how would an everyday employee without investment experience know?
Undisclosed fees are another problem altogether. Most of the people who look at their 401(k)?s prospectus have no idea that these fees are being taken out. And when trying to discern what they are, they are hit with a myriad of terms that are increasingly confusing.
- Asset managing fees
- Marketing fees
- Administrative fees
- Trading fees
- Legal fees
- Trustees fees
- Transactional fees
- Bookkeeping fees
- Finders fees
- Expense ratios
To name a few.
It can take a ton of research to figure out what is actually eating away at the earnings of your 401(k). These fees are expressed in percentages, and they grow over time, just like your money.
Compound interest, the very thing that grows your money, also applies to fees, which reduces your money. And as your money compounds, the fees compound.
?According to our fee model, a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns.????Robert Hiltonsmith
Many of these fees can come from revenue sharing arrangements. The fund advisers pay off the middlemen who are selling to potential investors to push their funds. This can also be how funds get on a 401(k) list to begin with. The more hands in the pie, the more fees.
?The 401(k) is one of the only products that Americans buy that they don’t know the price of it. It’s also one of the products that Americans buy that they don’t even know its quality. It’s one of the products that Americans buy that they don’t know its danger. And it’s because the industry, the mutual fund industry, have been able to protect themselves against regulation that would expose the danger and price of their products.? – Teresa Ghilarducci, Professor of Economics, The New School
Still, another part of the problem is the term ?financial advisor.?
Exactly what is a financial advisor? Financial advisers can don a number of names: financial planner, retirement planner, financial retirement advisor. But ultimately, a ?financial advisor? is a salesperson. And you have to ask yourself if a salesperson has your best interest in mind. Because, historically, financial advisors did not have a fiduciary duty to put your interests before their own.
Many financial advisors sell you financial products because they make money doing it. They make a commission from selling you that specific product. It is important to recognize that.
The Department of Labor Fights Back
The Department of Labor is responsible for regulating employee retirement plans.
In 2010 it submitted a proposal binding the fiduciary duty of financial advisors, which would require that they put their client?s interests in front of their own when dealing with retirement products. The financial industry lobbied against it. Congress got involved, and the Department of Labor was forced to rescind the proposal.
But the Department of Labor did not give up. A controversial new rule which requires retirement investment advisors, including broker-dealers and insurance agents, to abide by a fiduciary standard took effect in April 2017. However, any financial advice given before April 2017 is not covered by the new rule.
In addition, while the new rule prohibits revenue sharing arrangements, ?pressure by financial lobbyists has added a loophole to the rule by allowing an exemption to the prohibited transactions. This exemption is known as BICE (Best Interest Contract Exemption).
BICE allows the now prohibited methods of conflicted compensation to continue if the broker enters into a contract with the participant or IRA account holder stating the broker will:
- Attempt to act in their best interest.
- Disclose all potential conflicts of interest.
- Provide a detailed breakdown of their collected commission
Finally, the growing list of class action 401(k) lawsuits against companies for their lack of fiduciary duty and excessive fees should give anyone pause that something foul has been going on in the 401(k) markets.
- J.P. Morgan Chase
- Suntrust Bank
- International Paper
- Fidelity Investments
- Kraft Foods
- Lockheed Martin
- Northrop Grumman
- American Airlines
- Edison International
- General Electric
Take Control of Your 401(k)
If you have a 401(k) plan, it?s time for you to get your hands dirty and do some research. If the responsibility for retirement using 401(k) has been pushed upon the backs of employees, employees simply must take it upon themselves to understand what their 401(k) is invested in, what fees they are being subject to, and how they can get a better deal.
Remember that your 401(k) is not a savings account. It is an investment and you must actively manage it to mitigate risk.
Take control by asking your company questions so that you can make informed decisions. John Katovich of Cutting Edge Capital mentions that most people don?t know that they have a lot more power than they think they do.
?Individuals can march into their HR office and say, ?Let?s have a talk, tell me about my investments or put on a seminar for us. Explain to us how our money is impacting us. Am I investing in something?s that doing good, am I investing in something that?s actually harming me, I should know that, right? I want to know that.? – John Katovich, Cutting Edge Capital, Prosperity*
According to Katovich, the little-known secret about the 401k is that you can actually ask your company to set up a separate account that allows you to invest the way you want to invest.
?Imagine going into your company and saying, ‘I want to take 10% of my 401k retirement savings account and I want to invest it in some companies in my town.’ You can do that today, they?re not set up for it, the companies themselves don?t even know that they can do that, no one has been told that they can do that.?
If you have a 401(k), you need to find out exactly who is managing it, what they are charging, and what your money is doing. You can start by using free tools available online by the Financial Industry Regulatory Association (FINRA). FINRA?s job is to regulate brokerage firms doing business with the public in the United States. It’s a great place to start.
You can find out about your broker is by using FINRA?s free BrokerCheck Tool.
You can find out what funds you are invested in with FINRA?s free Fund Analyzer Tool.
You can also use Morningstar or Google Finance to help you research your funds.
Get a copy of your Fee Disclosure Statement. It is usually included in your 401(k) prospectus. Understanding your fees is going to take some effort, but there are free resources available that can help. The internet is your friend here.
Check out Demos.org?s The Retirement Savings Drain: ?The Hidden and Excessive Costs of 401(k)s which is a free booklet that you can download.
Once you have a clear picture of what your 401(k) is doing, you can make some informed decisions and take control.
Don?t like where your money is invested? Worried about People and Planet?
You have the power to incorporate Socially Responsible Investments into your portfolio. A new rule passed by the Department of Labor in 2015 makes it easier for you to invest in your 401(k) along with your values.
The Forum For Sustainable and Responsible Investing (USSIF) offers some tips and resources that may help you incorporate Socially Responsible funds into your 401(k) plan.
The bottom line?
The money in your 401(k) is your future. People can no longer afford to simply tick the box on their risk portfolio and hand the oversight of their future over to fund managers. The illusion that the financial industry, and even your HR department, actually have your future in mind while playing with your money has got to be discarded.
And only you can do it by exercising your rights and taking control.
Check out more great interviews and videos from leaders in conscious capitalism in the new feature film?Prosperity
Photo by?Jakub Gorajek
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Tags: 401(k), 401(k) fees, Department of Labor, dotcom bubble, FINRA, history of the 401(k), investing, pensions, retirement, saving, saving for retirement, Socially Responsible Investing, subprime mortgage crisis