401k news, 401k plan, 401k Retirement

ETFs in 401(k)

Posted on 23 April 2012

While individual investors welcome exchange-traded funds, major part of 401(k) retirement plans offer them the cold shoulder. That’s why many investors are trying to change the situation. For example, Invest&Retire was awarded a patent last year for technology it created to offer and trade ETFs in pension plans.

Exchange-traded funds currently make up almost 1% of total funds in defined contributions plans in the United States. The main part here is that the investors have systems, largely record-keeping systems, which were developed for mutual funds with end-of-day pricing, among many other things. When an investor has exchange-traded funds, they have an investment vehicle able to trade intra-day, not end-of-day. The technology in question was necessary to catch up to make such funds available in pension plans.

The main argument for having ETFs in retirement plans is that they have the cost-savings element. The investors have actively managed mutual funds which aren’t just expensive but able to have very high turnover ratios – costs of trading ETFs don’t have. Invest&Retire, for instance, prefers to have in 401(k) plans ETFs that have small bid-ask spreads (which is the gap between the prices at which investors are able to purchase or sell the security). When the investor is purchasing or selling or rebalancing portfolios, every basis point will count, and so will liquidity. That’s why investors demand ETFs with lots of liquidity that don’t use any derivatives or are not levered, which are quite easy to trade and expected to follow mainstream indexes.

Speaking about ETFs’ effect on volatility, experts say that they remain a drop in the bucket of daily trading volume. Usually people confuse exchange-traded notes with exchange-traded funds: the former is unsecured bank debt, which is backed by their issuer’s credit, while ETFs hold assets.

The possible drawback of the ETFs is that they are a relatively new idea. When companies are considering 401(k) plans and plan sponsors, this can be a group that appears reluctant to accept new ideas like this one. Invest&Retire, for example, only in 2010 accepted the idea that ETFs were a better way than using expensive mutual funds. Today this company has ETFs in its pension plan – they actually have the equation they advocate to help people build adequate retirement funds. Invest&Retire call the equation “the three C” – cost, compounding and contributions. In fact, their own 401(k) is all exchange-traded funds, using a Vanguard S&P 500 ETF and having the iShares Barclays Aggregate Bond Fund, for instance.

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401k news, 401k plan

401(k) Fees Made Transparent

Posted on 23 April 2012

Advisers now believe that new rules will lead to an increased awareness of costs overall. Indeed, as a result of over 4 years of deliberation, public comments and delays, the Labor Department’s disclosure rule will be enforced this summer. However, 70 million employees will not see the results until they get their 401(k) statements in late fall.

Experts predict that for both employees and plan sponsors the list of the fees and prices may come as a shock. For instance, the survey conducted last year revealed that over 70% of the employees believed they didn’t pay anything for their company retirement plan. The question remains how they will react to this new information and what they will use it for.

Meanwhile, the advisers believe that it’s a good thing, because people will finally realize that nothing is free, even in retirement plan. For example, J.P. Morgan Asset Management believes that there won’t be many plan participants to read and respond to the fee disclosures. Instead, the majority of employees are likely to ignore these reports, because fee disclosure is meaningless without context.

The matter is that some people can have a large account balance with little trading activity in a low-fee plan. Such people will have high fees expressed in dollar amount. On the other hand, if their account balance is low, even if their plan has a high expense ratio, their fees will look like little.

According to Labor Secretary, information on retirement plan expenses will make both employers and employees to draw conclusions and shop around by making informed decisions, which will lead to cost savings for workers. But the industry observers worry that it might have the opposite effect, and the disclosed fees will make employees to refuse saving for retirement.

Advisers also think that the new awareness about 401(k) fees could spill over into private accounts, making plan participants question the charges they have to pay for managed accounts outside of their employer retirement plan. Of course, lower costs increase investment returns, let investors retire sooner, and reduce the chances of running out of money.

Some investment advisers believe that the new disclosure legislation can cast a harsh light on commission-based advisers offering “free” planning services for revenue-sharing agreements. The others believe that new rules will only become an additional barrier to new providers in the market, which is already dominated by large players.

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401k news, 401k plan, 401k Retirement

How Much Exactly You Pay for Your 401(k)

Posted on 04 April 2012

Chances are that your employer hasn’t been rushing to calculate your costs in 401(k) and send report to everyone, but starting this summer, that will change. It is for the first time this year that the US Department of Labor will demand administrators of 401(k) plan, managing accounts for employers, to reveal information to employers and participants on how much exactly they are paying to operate the plans.

Of course, now many employers are putting their plans in place – they realize that this will create a lot of controversy. According to some estimations, total plan costs on a 100-participant plan having a $50,000 average account balance is somewhere between 0.36% and 1.71%. To let you understand this figure better, we can say that a worker with a 401(k) balance of $25,000, making a 7% annual return minus 0.5% in fees will find his balance at the level of $227,000 in 35 years, even without making further contributions. However, if the fees were 1.5%, the same worker’s balance will drop to scanty $163,000 at retirement, which is 28% less.

People working for a small employer are likely paying more for their 401(k) retirement plan than those working for a large company. The matter is because small employers do not have the economies of scale that large companies get. Statistics say that a lot of large companies charge participants only 20 basis points (around 0.2%), but the small company average charge is more than 4 times higher: 1.09%. As for the young companies, which have recently opened 401(k) plans and many newly hired employees, they will have the highest costs, which will surely be divvied up among participants.

Until today, understanding the costs of a retirement plan hasn’t been very easy, for both employers and workers. In case the costs for your 401(k) plan are very high, the employer is just as unhappy as you are. Now you will get a lot of information about your costs. Experts predict that the package of data you’ll receive on quarterly basis should be around 20 pages thick.

After receiving the report, by midsummer or fall, you may see answers to your basic questions. In case you don’t, you can ask them to your employer. The most popular questions plan participants want to ask include those about the size of total all-in fees and expenses applicable to their plan, the range of service provided for the costs paid, and the amount of money they have to pay for administering the plan until they retire.

The new legislation will encourage the companies to look hard at the costs they are paying for retirement plans and motivate plan providers to offer cheaper options. Meanwhile, the largest plan providers, like Fidelity Investments and Vanguard, have already been offering the plan participants new low-cost options, very attractive for investors.

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401k news, 401k plan

How to Fix Your 401(k)

Posted on 04 April 2012

According to the statistics, at many companies the 401(k) retirement plan isn’t shaped very well. However, any savvy employee is able to patch the holes and improve his odds of a secure retirement.

Millions of the US citizens pay serious attention to their investments, tracking the market situation and reading business reviews. But what they really need to know is whether their 401(k) plan is any good at all. Americans today hold $4.3 trillion in their 401(k)s and similar accounts, which is around 3 times as much as their $1.6 trillion held in annuities. However, these retirement plans are sometimes riddled with problems that can trip up even the most diligent investors. For example, they may include high, and in most cases hidden expenses and company-provided advice which may range from vague to just nonexistent at all. According to some consumer advocates, a lot of employers treat their plans as an afterthought. Of course, the financial-services industry, which gains something between $30 billion and $60 billion annually in fees from such plans, doesn’t have any incentive to change things. But you are able to change things on your own.

The employees today hold about $343 billion in target-date funds, which increased 3 times in the last 6 years, and these funds are mostly bought through retirement plans. 5 years ago, Congress passed a law to make it easier for the plan participants to use target-date funds as a default 401(k) option. That’s why over 80% of large employers now prefer them.

However, cost-conscious investors point at the expenses built into these funds. In fact, many of those products are just “funds of funds” spreading assets among many other investment options. Human resources consultants admit that an increase of just $50 per $10,000 in target-date-fund charges may cost a high earner the equivalent of 8 years’ worth of retirement savings during his career.

Some investors claim that it’s better to pay more for the convenience of the all-in-one funds. Moreover, the funds may have access to such assets as gold or foreign stocks, which workers aren’t able to get elsewhere in the plan. Others prefer to include Fidelity’s Freedom funds in their plans to try an alternative, whose expenses average $74 per $10,000.

Finally, there’s an even simpler rule of thumb: you may try to use only index funds when possible. The matter is that the typical 401(k) fee structure widens the already substantial expense gap between indexes and active funds. In fact, investors in actively managed funds end up with subsidizing their coworkers, and using index funds means getting that subsidy, instead of having to pay it.

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401k news, 401k plan

Kansas 401(k)-Style Plan Lost Support.

Posted on 04 April 2012

It seems that Republicans in the Legislature lose interest in a proposal to start 401(k)-style retirement plan for new Kansas teachers and government workers. Indeed, public worker groups, their allies and very skeptical GOP legislators have almost killed chances that Kansas will start a pension plan similar to that which is today common for private companies.

Currently, the House Pensions and Benefits Committee is working on an alternative which is a big step away from a 401(k) plan, even though its chairman and vice-chairman were supporting this plan in the past. Meanwhile, the Senate’s pensions committee faces similar discussions over the plan. However, their work will result in nothing if they don’t get the Republicans’ support back. The experts believe that a potential veto may become a powerful incentive for the Republicans that control both bodies to return to the 401(k) fold.

The Public Employees Retirement System of the State of Kansas predicted an $8.3 billion gap between expected revenues and benefits promised to teachers and government workers by 2033. This shortfall made legislators in 2011 increase the state’s annual contribution to KPERS and demand concessions from employees. However, many legislators aren’t sure that those changes will be enough to safeguard the pension system’s health for long. They claim that the state isn’t able to sustain traditional KPERS plans that guarantee employees’ benefits based on their salaries and years of service.

Critics claim that starting a new 401(k)-style plan will not solve the problem of the funding shortfall in existing plans, but will come with additional startup costs. According to their estimations, the commission’s plan would cost the government another $10.9 billion within the nest 50 years. However, some lawmakers tend to dispute that figure.

In addition, public employee groups contend that 401(k)-style plans shift the financial risk from a sour economy from the state to the employees, whose benefits will become less lucrative. After their arguments have resonated, the support for the suggestion of 401(k)-style plan has eroded. This made both pensions committees to look for similar alternatives providing new public employees certain guarantees without connecting their benefits to their salaries and years of service. These suggestions are based on a Nebraska program.

According to new plan, teachers and government workers hired after next year would contribute 6% of their salaries to their retirement funds, while the state would add up to 4%, guaranteeing 5% annual interest on the combined amount.

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