AAII Journal Editor
Understanding 401(k) Mechanics
This 1996 article explains how 401(k) plans work.
Picking the Right Tax Pocket
Your 401(k) plan can optimize your tax exposure.
AAII Discussion Boards
What do you think of your 401(k) plan?
This week’s AAII Sentiment Survey results:
Bullish: 34.7%, down 7.2 points
Neutral: 32.6%, up 0.5 points
Bearish: 32.6%, up 6.8 points
August 23, 2012
August 16, 2012
August 9, 2012
August 2, 2012
July 26, 2012
July 19, 2012
July 12, 2012
July 5, 2012
June 28, 2012
June 21, 2012
June 14, 2012
June 7, 2012
May 31, 2012
May 24, 2012
May 17, 2012
May 10, 2012
May 3, 2012
April 26, 2012
April 19, 2012
April 12, 2012
April 5, 2012
March 29, 2012
March 22, 2012
March 15, 2012
March 8, 2012
March 1, 2012
February 23, 2012
February 16, 2012
February 9, 2012
February 2, 2012
January 26, 2012
January 19, 2012
If you have a 401(k) plan, you should have received new documentation by today. Though it may seem like more fine type and regulatory jargon, the new documentation is actually expanded information about performance, fees and expenses. Be sure to read it.
The expanded information is mandated by a new Labor Department requirement that plan sponsors provide increased transparency on costs. According to an AARP survey, many employees incorrectly think they aren’t paying any fees. It is likely that many others have no idea what their plans cost. Since every dollar paid in expenses is a dollar you will never see again—or be able to turn into greater wealth—what you pay in fees is no small matter. That’s not to mention that as the value of your retirement savings increases, the total dollar amount of what you pay in fees also increases. (Mutual fund companies and plan advisers take a percentage cut of total assets.)
The new rules require two disclosures. The deadline for getting the first notice to plan participants is today, August 30. This notice details the plan’s costs, performance data on all investment options—including variable and fixed-rate products (if offered)—and the performance of comparative benchmarks (e.g., the S&P 500 for large-cap funds). The second disclosure, a quarterly notice first due out in November, will detail how much you are personally paying in fees, including charges related to any 401(k) loans.
Fund fees are the one expense you can directly manage. Look at the annual expense ratios for the funds you personally own and compare them to other, similar funds offered in your 401(k) plan. Also look for any loads (charges for buying or selling a fund) or other related expenses. Then look at the returns over a period of years. You want to avoid those funds with high expense ratios and comparatively poor performance, and favor those funds with low expense ratios and comparatively high performance. Keep in mind that the expenses of a large-cap, domestic stock fund will be lower than those of an international bond fund, so compare funds only among their category peers.
Your plan may levy additional charges as well. These are costs for managing the 401(k). They vary based on the size of the plan (large companies tend to have lower costs as a percentage of total assets) and the extent to which the employer absorbs the costs charged by the plan sponsors and advisers. There can also be charges for joining the plan, leaving the plan or converting a traditional 401(k) to a Roth 401(k).
If you are unhappy with the costs or the plan options, you can speak to your company’s human resources department. Understand, however, that making changes to a 401(k) plan is not something that can be easily accomplished.
Now is also a good time to review the allocation of your 401(k) holdings, if you haven’t done so this year. Look at how much you have allocated to large-cap stocks, small-cap stocks, international stocks and bonds. Does the allocation make sense given your age, goals and investments you own outside of your 401(k)? (See our Asset Allocation Models for examples of how you may want to allocate your portfolio.) If not, you should change your 401(k) holdings to bring it back in line with your goals.
Finally, look at your regular contributions. Are you saving enough to take full advantage of the company’s 401(k) matching contributions? If not, try increasing your deferral rates. Even a 0.5% increase can have a long-term positive impact on your wealth. If you are only saving enough to maximize your employer’s 401(k) match, consider boosting your deferrals even more. This year, the IRS allows you to contribute up to $17,000. If you are age 50 or older, you can set aside an additional $5,500. Since these contributions are made on a pretax basis, you will give up less than a dollar in take-home pay for each dollar you increase your contribution by.
More on AAII.com
- Understanding 401(k) Mechanics: A Look at How the Plans Operate (PDF) – I found this article while going through our archives. Though published in 1996, most of the information in it is still relevant today.
- Picking the Right Tax Pocket for Your Assets –There are tax advantages that can be realized if you treat your 401(k) as part of your broad portfolio, instead of as simply a single account.
- Guide to Top Mutual Funds 2012 – Though many 401(k) plans hold institutional instead of retail mutual funds, our annual guide can help you gauge which are the best offerings in your plan.
- What Do You Think of Your 401(k) Plan? – Tell us on the AAII Discussion Boards.
- Don’t forget to take the Sentiment Survey.
The Week Ahead
The U.S. financial markets will be closed Monday, in observance of Labor Day.
The only S&P 500 companies scheduled to report earnings next week are Campbell Soup Company (CPB) on Tuesday, H&R Block (HRB) on Wednesday and Kroger (KR) on Friday.
The week’s first economic reports will be the August ISM manufacturing index and July construction spending, both of which will be published on Tuesday. Wednesday will feature the revised estimates of second-quarter productivity. The August ISM non-manufacturing index and the August ADP Employment Report will be published on Thursday. Friday will feature August jobs data—including the change in nonfarm payrolls and the unemployment rate.
September has historically been the worst month of the year for stock prices. According to Sam Stovall at S&P Capital IQ, the “500” has fallen by an average of 0.7% in September since 1900, whereas it rose by an average of 0.54% for all calendar months. Keep the average returns in mind before worrying; you could lose more in transaction and tax costs by selling now and buying your holdings back at the end of the month.
AAII Sentiment Survey
Bullish sentiment retreated and pessimism reached a four-week high in the latest AAII Sentiment Survey.
Bullish sentiment, expectations that stock prices will rise over the next six months, fell 7.2 percentage points to 34.7%. Optimism is now at a four-week low. Bullish sentiment is also below its historical average of 39% for the 21st time in the past 22 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 0.5 percentage points to 32.6%. This is the fifth consecutive week and the ninth out of the past 11 weeks that neutral sentiment has been above its historical average of 31%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 6.8 percentage points to 32.6%. This is the first time since August 2, 2012, that pessimism is above its historical average of 30%.
A pause in the recent rally deflated some of the cautious optimism registered in last week's survey results. Though some investors are encouraged about the continued growth in the U.S. economy, others remained worried about slowing global economic growth, Washington politics and the European sovereign debt crisis.
This week's special question asked AAII members whether this year's 12.4% rise in the S&P 500 (as of August 23, 2012) is warranted. Responses were almost evenly split, with those who thought the rally wasn't justified slightly outnumbering those who thought it was justified. Reasons varied, though several members cited the Federal Reserve's actions, weak U.S. economic growth and European sovereign problems as reasons why the rally isn't justified. Conversely, several members pointed to corporate earnings and the lack of better investment alternatives as reasons why stocks should be up this year.
Here is a sampling of the responses:
- “Not warranted since the economy is weak and profit margins are not sustainable.”
- “I think the rally is somewhat artificial. It’s propped up by the Federal Reserve’s policies and hype.”
- “I’m not totally sure what’s causing it. Too many negative areas globally to be that optimistic (China, the Fed, Europe, etc.).”
- “Yes, it is warranted. Where else is there to put your money and get a decent return?”
- “I think last year’s flat market and this year’s corporate earnings support the 12% rise.”
- “Stock prices are catching up with corporate earnings and balance sheet strength, so yes, the rally is warranted.”
Wishing you prosperity,
Charles Rotblut, CFA
AAII Journal Editor