How to benefit from new retirement fee disclosures
By Mark Miller
(Reuters) – Transparency will be coming to your 401(k) plan next year in the form of new quarterly reports that clearly disclose the fees you pay on investments. Now, the question is: What will you be able to do with the new-found information?
The new reports will turn up no later than the second quarter, and you’ll see information about fees being charged to your plan – and the actual dollar amounts charged against your own account and mutual fund choices.
The fee disclosure is mandated under new U.S. Department of Labor rules, and the numbers should be a real eye-opener. Fees vary widely among retirement plans – anywhere from well below one percentage point to a whopping five percent. Yet 71 percent of retirement savers don’t think they pay any investment fees at all, according to a recent AARP survey.
“I think the public will be shocked when they see the dollar amounts they are paying,” says David Loeper, author of “Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money.” “If I have $100,000 in my plan and I’m being charged two or three percentage points, it’s going to dawn on me that I’m paying $2,500 a year in fees that I didn’t know about.”
The disclosures pose some key questions for retirement savers. How should you interpret the new fee information? And, if the fees in your plan are too high, what can you do about it?
Nothing affects long-term retirement portfolio success more than fees. A 2010 Morningstar study found that fees trump performance as a predictor of success, with low-cost funds turning in much better returns than high cost funds across every asset class from 2005 through March 2010. The lowest-cost domestic equity funds returned an annualized 3.35 percent over that period, compared with 2.02 percent for the most expensive group.
Why Obama’s payroll tax cut extension is the best worst option
By Mark Miller
(Reuters) – The White House unveiled a countdown clock this week, tick-tocking away the days, hours, minutes and seconds to a December 31 deadline for extending and expanding the payroll tax cut. It’s a doomsday-style reminder that taxes will jump for an estimated 160 million Americans on January 1 if Congress doesn’t act.
President Obama is proposing a one-year extension and expansion of the tax holiday already in place on the employee share of the payroll tax, cutting it to 3.1 percent from the 2011 rate of 4.2 percent. He also proposes cutting the employer share of the tax to 3.1 percent from 6.2 percent on the first $5 million of payroll next year; there would be a complete employer payroll tax holiday for companies that grow their payrolls up to $50 million in a year by hiring new workers or raising the salaries of existing workers.
The payroll tax cut has the advantage of immediacy. It puts money in workers’ pockets – $2,170 next year for a married couple filing jointly with $70,000 in gross income, according to White House estimates. That’s a meaningful tax break, especially in hard times. And, most of the cut would go to middle and low-income workers. That means most of the money likely will be spent, which is good for the economy.
However, what’s good for the economy now could well be be bad for Social Security later.
The payroll tax actually is the line on your pay stub labeled FICA – the Federal Insurance Contributions Act. Although technically – and legally – a tax, the architects of Social Security always intended FICA as a premium payment that workers would contribute to their retirement. Franklin D. Roosevelt is famously quoted in the papers of one of his aides as saying the dedicated FICA revenue source was critical, because it meant “no damn politician can ever scrap my social security program.”
Thus far, Social Security has been held harmless from the FICA holiday; the losses have been made up from general federal revenue. But extending the cuts further does muddy the water on Social Security’s self-funding feature.
7 ways to tweak your retirement plan for 2012
By Mark Miller
(Reuters) – “Set it and forget it,” infomercial marketer extraordinaire Ron Popeil used to say.
That might have worked for Ron’s easy-to-use chicken rotisserie — but it’s not a good approach for your retirement portfolio. Even the best-built retirement plan needs a periodic check-up, so here’s a list of seven tips, tweaks and reminders for the year ahead.
1. Adjust your 401(k) contribution.
The maximum employee contribution allowable by the IRS rises by $500 in 2012, to $17,000; workers over age 50 can contribute another $5,500 in catch-up contributions. If you’re already maxing out, adjust your contribution rate for 2012 accordingly. Deductible contribution maximums for traditional IRAs and Roth IRAs are unchanged for 2012 – you can sock away $5,000 (or $6,000 if you are over age 50).
2. Rebalance.
Make sure your equity and fixed income allocations are on target by buying or selling assets as needed to make sure you’re not taking more risk than desired. Adds Jessica Ness, director of financial planning at Glassman Wealth Services: “Rebalancing puts an automatic buy-low and sell-high methodology to work because you trim asset classes that have grown in size and you contribute to asset classes that have shrunk.” Ideally, you should rebalance quarterly.
Auto-enrollment’s on a roll, Fidelity reports
Nov 29 (Reuters) – A growing number of employers automatically enroll new workers in their retirement saving plans, boosting participation rates and the use of other automation features.
That’s the key finding of a new Fidelity Investments analysis of the impact of the Pension Protection Act of 2006 (PPA) on 401(k) plan design and participant saving behavior. The analysis is based on data at the end of the third quarter of this year from 20,600 corporate defined-contribution plans administered by Fidelity, covering 11.7 million participants.
The PPA encouraged adoption of auto-enrollment features and default investment options, mainly target date funds (TDFs), which set and adjust equity and fixed-income allocations by participant age. Fidelity reports that 51 percent of its 401(k) participants are now in plans that auto-enroll employees automatically when they are hired, up from just 16 percent five years ago.
This mirrors findings of another study, by the Profit Sharing/401(k) Council of America released on Wednesday. That study found that 8 percent of plans added an auto-enrollment feature in 2010 alone.(The PSCA study also found a “dramatic” increase in the number of employers tinkering with their 401(k) investment choices.)
Employees may opt out of auto-enrollment plans, but participation rates at companies that now have them stands at 82 percent, compared with 55 percent at companies with plans that don’t auto-enroll, according to the Fidelity study.
Across all Fidelity-administered plans, the participation rate stood at 66 percent at the end of the third quarter, up from 64 percent in 2007, says Beth McHugh, vice president of market insights at Fidelity. “The overall participation rates are moving more slowly because most plan sponsors only auto-sweep their new hires,” she adds. “Very few are auto-sweeping their existing workforce.”
Auto-enrollment is having dramatic impact on young workers. Employees age 20 to 24 working for companies that auto-enroll are participating at a 76 percent rate, compared with just 20 percent at plans without the automatic feature.
Deficit battle won’t cause fight between old and young
By Mark Miller
(Reuters) – Now that the Super Committee has ground to a halt, the threatened “sword of Damocles” is poised to slash $1.2 trillion in federal spending. As we move to this next phase of the budget wars, deficit hawks will rev up one of their most phony arguments — namely, that protecting entitlement programs rewards the old at the expense of the young.
The debt ceiling deal last summer calls for automatic cuts to start in 2013, absent a Super Committee deal, with the reductions split evenly between defense and domestic spending programs — but Social Security and Medicare are mostly exempt.
Deficit hawks already were predicting the break-out of intergenerational warfare before the Super Committee reached stalemate. Former Senator Alan Simpson attacked an AARP television ad reminding lawmakers that seniors vote, and warning them not to cut Social Security or Medicare. In his Super Committee testimony, Simpson called the ad disgusting and called on young people to remember AARP in 2036, when their benefit checks will be slashed 20 percent or more.
Simpson previously has called AARP a bunch of “greedy geezers” who don’t care about future generations. Republican Presidential contender Rick Perry calls Social Security a Ponzi scheme designed to rob the young. Deficit commissions demand a higher Medicare eligibility age and more privatization.
I’ll stipulate that the budget sword — if Congress does indeed let it fall — will hurt many Americans in need of help. But the domestic cuts won’t affect only the young. Dozens of federal programs will be affected, ranging from the Women, Infants & Children nutrition program and Head Start, to senior housing and home weatherization.
The deficit hawks are trying to force a false choice: cut entitlements, or help the young.
5 questions about the GOP’s plan to privatize Medicare
Nov 17 (Reuters) – The Congressional Super Committee negotiations are coming down to the wire, and Republicans are demanding that Medicare privatization be included in any final budget deal.
The news comes on the heels of GOP Presidential candidate Mitt Romney’s recent call for creation of a “premium support” option that would let seniors choose between traditional fee-for-service Medicare or a defined amount of money that they could use to shop for a private plan in a federally-sponsored Medicare exchange marketplace. Romney’s proposal is a cousin of the privatization plan proposed by Rep. Paul Ryan, and endorsed by the House of Representatives earlier this year.
Even if the Super Committee process stalls, the future of Medicare will be a key issue in the 2012 Presidential race, and any restructuring of the program would impact billions of dollars of healthcare spending and tens of millions of beneficiaries. How would privatization impact seniors? How would benefits change, and what would it mean for seniors’ cost of healthcare? Here are answers to five key issues.
1. What are Medicare premium supports and vouchers, and how would they change the current Medicare program?
Proposals for Medicare premium supports and vouchers all have one thing in common: They would transform Medicare from a program of defined benefits to one of defined contribution. Much like the transition from defined benefit pensions to defined contribution 401(k) plans, the change would shift risk from an institution (the federal government) to individuals (seniors). Medicare today promises to deliver a specific set of benefits to seniors; premium supports and vouchers would provide a defined government contribution toward whatever healthcare cost they incur in the private market.
But there’s a significant difference between premium supports and vouchers. Vouchers could be set purely on the basis of meeting federal budget-cutting goals. Premium supports usually take into account some measure of the cost of purchasing private coverage.
Romney hasn’t released details on his Medicare proposal, but it appears to most closely resemble the proposal of the Bipartisan Policy Center’s Debt Reduction Task Force, which was chaired by Alice Rivlin, the Clinton Administration’s budget director, and former Republican Sen. Pete Domenici.
Your employer’s stock: How much is too much?
Nov 11 (Reuters) – The 2001 collapse of Enron may look like small potatoes by post-2008 standards of corporate malfeasance and disaster. But it was pretty ugly at the time — and nothing was more painful to watch than the hit employees took when they lost their jobs and their retirement savings all in one blow.
At the end of 2000, 62 percent of assets in Enron’s 401(k) were held in the company’s own stock; when Enron went into a free fall the following year, it froze the plan assets and soon-to-be-jobless workers watched helplessly as their savings evaporated.
The Enron debacle helped advance a pension reform debate in Washington that ultimately produced the Pension Protection Act of 2006 (PPA). That law included several important reforms aimed at reducing worker exposure to the employer stock, but it stopped short of actual restrictions on the amount they could hold.
Five years later, plenty of big corporations still have heavy concentrations of their own stock in retirement plans. Brightscope, a financial research firm, provided Reuters with a list of companies with the highest concentrations of their own shares in 401(k) plans (see chart at).
In some cases, the heavy concentrations are the legacy of earlier employee stock ownership plans, or companies that use their own shares to provide matching contributions. That’s the case at Colgate-Palmolive Co. , which topped the list with 75.4 percent of plan assets in its own stock at the end of 2009 (the most recent data available). The company has offered matching contributions in its own shares since 1989, a company spokeswoman says.
Scana Corp ., an energy company that ranked No. 4 on the Brightscope list, had 100 percent of its plan in company stock until it began diversification efforts in 2000. Another factor: its stock has been a strong performer.
Towers Watson research shows that 78 percent of Fortune 100 employers who allow employees to hold their own shares don’t limit their holdings.
One man’s retirement crusade to help Detroit and baby boomers
Randal Charlton has had a long, colorful career with plenty of ups and downs. In his 71 years, he’s done everything from tending dairy cows for a Saudi sheik to starting a jazz club in Florida. And as a lifelong entrepreneur, he has bought and sold 14 different companies.
Charlton’s last venture was a Detroit-based biotech company called Asterand, which he co-founded and then merged in 2006 with a U.K.-based competitor. He was 67 years old after the deal closed – a time when many would hang up their spikes and take it easy.
Instead, Charlton took on a daunting new challenge: fighting Motor City’s economic blight by building a successful business incubator for entrepreneurs called TechTown. Charlton raised $24 million from foundations and government, gathered together an impressive array of resources for training and start-up funding and recruited a small army of start-ups that have created a total of more than 1,800 local jobs.
TechTown is located in an old five-floor automotive plant with 130,000 square feet. When Charlton took over, just one floor was built out, and the center was running on loans guaranteed by nearby Wayne State University. Since then, the incubator has been home to 250 companies, and more than 2,200 entrepreneurs have graduated from its training programs. Last year, 14 TechTown companies received capital infusions totaling more than $1.35 million. The incubator has invested $700,000 directly in early-stage businesses and helped clients raise $14 million in follow-on funding.
Charlton’s work has just been recognized with a 2011 Purpose Prize, announced today. The award, given annually by the Encore Careers campaign, recognizes older career trailblazers who have demonstrated creative and effective work tackling social problems. Now in its sixth year, the prize was created to promote and encourage civic engagement among baby boomers. It’s a program of Civic Ventures, a nonprofit that works to engage boomers in encore careers combining personal meaning, income and social impact.
Each prize winner receives $100,000. The other winners this year include a San Francisco-area screenwriter who adopted two daughters from China in her fifties, then found a way to partner with the Chinese government in efforts to transform the care of 800,000 orphans there; an Oregon woman who produces and distributes low-cost, safe, fuel-efficient cookstoves in Latin America; and a Santa Fe, New Mexico architect working to improve energy efficiency and reduce emissions in buildings.
A native of England, Charlton started his career after college as an agriculture journalist, and then worked for an agricultural export company. His work has taken him to 40 countries and many adventures, including living for weeks in a Saudi Arabian desert nursing a sheik’s herd of cows back to health. Later he acted as a consultant for cattle breeding associations and for the European Development Fund, and as an executive for several global biotechnology companies.
Jobless rate for older workers is lower, not better
Rick Lopatin has been looking for work for three years. The 56-year-old is the former chief financial officer of a middle-market pharmaceutical company in the Chicago area; ever since a merger and his subsequent job loss in 2008, he’s been job-hunting and networking intensively, and he’s landed several interim CFO engagements – including one at a medical devices company on Long Island.
That company offered to make the job permanent, but Lopatin turned it down. He figured the position might have lasted just a few years, and it would have required relocating from the Chicago suburbs, where Lopatin’s wife has a secure managerial position at one of Chicago’s largest hospital systems — a job she’s held for 15 years. “We just couldn’t afford to put that income at risk,” Lopatin explains.
Lopatin’s experience helps illustrate the sharp contrasts in national unemployment data between older and younger workers. The unemployment rate for workers over age 55 is much lower than for the workforce as a whole – it stood at 6.7 percent in September, compared with the 9.1 percent national rate. But at the same time, workers over age 55 who do lose their jobs tend to be jobless far longer – 54.8 weeks, compared with 38.6 weeks for younger workers as of last week.
Reduced mobility helps explain the longer job search time, says Sara E. Rix, an expert on workforce and employment issues at the AARP Public Policy Institute. “Older workers may be ready and willing to move, but they’re not able to do it due to a spouse with a well-established career,” she says. Age discrimination plays a role, too – and Rix thinks some older workers struggle to acclimate to job hunting when they’ve out of the market for a long time. “At least initially after a job loss, there’s evidence that workers who do get offers tend to hold out for something better. As the jobless period gets longer, they’re willing to accept less than at the beginning.”
What’s more, the lower 55+ jobless rate doesn’t really mean older workers are having an easier time finding new jobs, Rix says. Rather, she thinks it reflects a trend among employers to hang on longer to more experienced workers. The lower jobless rate also reflects a greater tendency of older workers to become discouraged about finding new jobs, and drop out of the labor force entirely. The Bureau of Labor Statistics doesn’t count workers who have stopped looking for jobs in its unemployment calculations, and that brings down the overall 55+ jobless rate.
But don’t mistake discouragement for lack of interest in a job. Rix notes that there’s been a steady rise in labor force participation by older workers – in fact, the number of employed workers over age 55 is up 11 percent since December 2007.
Medicare Part B premium hike will be smaller than expected
Seniors caught a break Thursday when the Obama Administration announced that Medicare Part B premiums won’t rise as much as expected in 2012.
The premium for Part B – which funds doctor and other outpatient services – will be $99.90 in 2012, up just 3 percent compared with this year. And the Medicare Part B deductible will be $140, a decrease of $22 from 2011.
The official government 2012 Part B premium forecast had been $106.60 – an increase that would have taken a significant bite out of Social Security’s cost-of-living adjustment (COLA). Although Social Security beneficiaries will receive a 3.6 percent raise next year, the average beneficiary’s increase would have been shaved to 2.95 percent if the larger Part B increase had been implemented. Part B premiums are deducted from most seniors’ Social Security benefits.
Today’s news means that seniors receiving the average monthly Social Security benefit ($1,177) will see a net 3.3 percent gain in payments – just under $39 per month.
In 2010, the Part B premium jumped to $110.50 from $96.40, and it rose to $115.40 in 2011. The rate is determined partly by healthcare inflation — but also the number of seniors who actually are subject to higher premiums. By law, the premium cannot rise in any given year by a greater amount than the Social Security COLA – a “hold harmless” provision aimed at preventing Social Security payments from ever falling. About 75 percent of beneficiaries were exempted in this way from Part B premium increases in 2010 and 2011 – years in which no Social Security COLA was made.
Medicare enrollees cover 25 percent of projected Part B program costs; in 2010 and 2011, that projected cost was borne by a much more narrow base of beneficiaries. This year’s Social Security COLA means that beneficiaries’ portion of Part B cost will be spread across a much broader pool of seniors, resulting in the more modest premium hike.
The new premium will mean a decrease for seniors who enrolled in Medicare for the first time this year, and have been paying the $115.40 rate. It should also lead to decreases for high-income seniors, who were subject to the higher base premium, along with additional income-related surcharges.
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