Memo to participants/considerers of 401(k) investments

18 years ago

Greetings investors,

All that I know about the 401(k) system, you could stick into your eye! As a Canadian I know next to nothing of them, but have gained the impression that mutual funds are related to them.

I have found some information that claims to relate to them which I think may interest some of you who use them or may be interested.

The source is a financial advisory service that I prefer not to identify here but will tell you privately if you ask. They are solely an advisory service and do not manage funds or other financial instruments.

Their message assumes a contribution of $100.00 per month, $1,200.00 per year.

They assume also a rate of return of 10.4% on the ongoing investment, which they claim to be, " ... the market's average over the long haul".

Then they assume that one investment which the owner chooses is operated by a management company which charges an annual management fee of 2% of (I assume) the central account, allocated according to the proportion of that account owned by each of the investors ... so does not show on their annual account report, but does appear on the prospectus outlining the operating system of that fund - their Management Expense Rate (MER).

Their calculation is that, after 40 years of such an investment and management program, the value of the fund would be $349,000.

However, they say, if the not-so-average investor, wanting to learn more about the way that his/her investment works, could make use of a manager whose annual management fee was only 0.4%, and assuming that the growth rate could be as they assumed earlier, the average rate of growth of the market as a whole, that $1,200.00 annual investment for 40 years would have grown, after 40 years, to $632,000.

That is an increase of $283,000.00, a substantial increase.

There are some assumptions here which might not work out in fact - they are for purposes of comparison in this instance.

I offer this information for your consideration, but do not recommend it (or not, either).

As I have said in these forums recently, the rate of annual management fee charged by management companies of mutual funds has a substantial result in terms of their ongoing performance results.

The longer the term - the larger that variation on the final result becomes.

In this case, a potential increase of $283,000. (or any comparable amount) is pretty good potential pay for learning how to manage one aspect of one's asset more effectively!

Some ideas that you may find interesting.

ole joyful

Sort by:Oldest

Comments (8)

glenda_al
18 years ago
Interesting!
Chemocurl zn5b/6a Indiana
18 years ago
Hi OJ,

You are right in that they usually contain a choice of mutual funds.

Below is a link to the funds offered by my previous employer, Verizon.

One of the main benefits of a 401k though is that the employer matches all or a portion of an employees contribution to it up to a certain percent of their wages.

Pensions as you well know are more rare than they were in years past, so the 401k is often a wonderful incentive for the worker to save for his/her retirement, with b4 tax dollars.

Sue

Here is a link that might be useful: 401K Funds offered by Verizon's plan
Related Discussions
Transferring 401K to Traditional IRA in this volatile market
Q
Comments (7)
Remember you can own more than 40 different types of assets in an IRA account. You're not limited to holding just traditional securities. Most major brokerage firms managing IRAs offer a selection of mutual funds for you to invest in but restrict your holdings to traditional securities. They are usually not equipped to handle real estate, private equities or others asset classes that the IRS permits. For instance, you can own most any type of real estate including vacation houses, boat slips, and/or commercial. You cannot, however, own any real estate that you care currently benefiting from. For example, you can own a beach house but you or your family cannot use the property during the time it's held within your IRA. But, you can rent it for a profit. Another example...you can purchase a building lot and flip it 30 days later for a profit...all legal within your IRA. You can even invest in cattle within your IRA. Banks will also lend on IRA purchases. So, it's possible to use leverage. You can expect to pay a slightly higher interest rate than if you were borrowing personally but, in some cases such as real estate, the ability to use leverage in your IRA more than justifies the higher rate. Most people are only aware of the traditional mutual fund type of investments. But, if those are doing poorly...well, you've got other choices. To invest in other types of assets, you need to open whats called a "self-directed IRA" with a custodian that allows you to invest in the full range of asset types allowed by the IRS. With a self-directed IRA, you can invest in real estate and privately held businesses, make secured loans (such as a mortgage), make unsecured loans, and also invest in traditional assets such as stocks and mutual funds. With real estate bought by a self-directed IRA, any income and capital gains grow tax-deferred in the case of traditional IRA or tax-free in the case of a Roth. Fees for a "self directed" IRA with a full-service custodian are higher than those charged by custodians offering only traditional securities. There are only 3 assets classes the IRS forbids you to hold within an IRA: Collectibles, Life Insurance, & S Corporations. As usual with the IRS, there are lots of little quirky rules that failure to follow could result in significant penalties so this type of IRA investing is not recommended for people skittish about actively participating in the decision making process. Anyway, you would not have to sell an office building or a herd of cattle just because you changed custodians. The "system" is geared towards funneling the "masses" into traditional securities. OTOH, that's the safest investment for the vast majority of people. /tricia
...See More
not paying off mortgage, but invest in what?
Q
Comments (31)
>>The recent run up in the market has put me in a mind to move money around, but attempting to time the market has always proven to be a losing proposition for me!!! Every time I have tried to time the market, I have lost money.... if I would have just stayed put, I'd be much better off today. Exactly. You are following (what it sounds like to me, so apologies if this isn't correct) the "herd" mentality and buying when it is popular (high) and then panic selling when the market falls. It's no different than buying a house at the top of the RE runup and then watching the RE 'bubble' burst on you (yeah, it happened to us in 1989, so I know how it feels!). Steady, reasoned investing with a diversified portfolio - which you are NOT doing by having only 2 funds in mind - gives better results over time. You will not gain hugely in hot stock years, but you will also not lose hugely in bad ones, such as the 27% drop in the S&P 500 from 2000-2002 and the dot-com implosion. Our retirement portfolio was 85% invested in the S&P 500 in 2000. Lost my job in the dot-com implosion and watched my husband's retirement savings lose a quarter of their value. My husband asked me what we should do. I told him the fundamentals were still in our favor, we're investing for the long term, and that the big stocks would recover first which is the historical norm. Within 18 months we had regained the losses and the portfolio has gained 11-22% annually since, BUT we are currently more aggressively diversified into international stocks on the advice of my ex-boss. He's an independent Certified Financial Planner who can pick and choose his customers because he's semi-retired and only takes referrals, no hard advertising for years now. What I learned from him that was a lot more important than any stock tip was to get my legal and financial house in order! This meant a customized Revocable Trust (we learned what NOT to have while trying to update my widowed MIL's outdated Trust!), new wills, power of attorney docs, durable healthcare POA updates (including the crucial HIPAA release which nobody ever tells you about, but legally a doctor can't even tell your spouse what's wrong with you, emergency or no, without it). I also finally consolidated all my previous employer 401k's into one IRA at a low-cost brokerage. I'd been meaning to do it for years, but kept putting it off. I finally got a first-hand lesson just before I left the CFP's employ - a widow signed on as a new client and her husband had left half a dozen 401k's scattered around at various tech companies. It was a paperwork NIGHTMARE to get them consolidated under the widow's name! So that was on my to-do list before I could start looking for work, LOL. You cannot "time" the market. Free advice is usually worth what you have paid for it. Heck, even a lot of paid advice often isn't worth it! As my ex-boss would tell people, "Hey, if I knew what the next hot stock would be, do you think I'd still be doing the CFP thing??!??" Mind you, he makes a very comfortable living; nothing outrageous and nouveau riche, just a good solid six-figure income plus he loves what he does, working with people and helping them secure a good financial future. Set up a regular investment program and diversify through mutual funds at a low-cost brokerage. At least 3 funds in different markets, preferably 5 as your portfolio grows. Check the 10 yr average returns because the 5 yr averages are now skewed - the 'dog years' of 2000-2001 have now fallen off the 5 yr average. For those who are saving for college, 529 plans are not counted in most college aid plans because the adult retains ownership, a child is merely the beneficiary and it can be changed at any time. However, 529 plans are only useful if your investment horizon is at least 10-15 years. A UTMA account can be transferred to a 529 plan but you will need to talk to your financial advisor or brokerage for full details.
...See More
Changing from 401k to a 403B
Q
Comments (9)
I will give your question a shot and I am sure others will also add their advice. On question 1 - I suspect that the fees charged to manage the 403B are less that those charged for the 401k Here is info from the IRS website on 403B plans "IRC 403(b) Plans Certain employers are allowed to have Internal Revenue Service (IRC) 403(b) Tax-Sheltered Annuity plans. You are allowed to have a 403(b) plan if you are: A public school, college or university, A church, A public hospital, or A charitable entity tax-exempt under section 501(c)(3) of the Code. Basically, 403(b) plans are similar to 401(k) plans maintained by for-profit entities. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by the employer. This deferred money generally does not get taxed by the federal government or by most state governments until distributed. This is just as it is with 401(k) plans." I assume that your husband's employer meets the requirements for establishing a 403B plan. On question 2 - You can roll the money into a traditional IRA without having any tax consequences. You need to set it up as a direct rollover - that is the company that holds the 401K transfers the money directly to the bank/investment company that will have your husband's IRA. You cannot roll the money into a Roth IRA. The money that is contributed to a ROTH IRA has already had the income taxes paid on it. The money in the 401k has not had any taxes paid on it. If the money goes into a traditional IRA, you need to establish a separate IRA for that money. If your husband ever goes to work with a company that has a 401K plan that allows rollovers into the plan and your husband chooses to roll this portion of his IRA into that new employer's plan, it must not be mingled with other retirement funds. Good luck.
...See More
Where would you put 20K right now?
Q
Comments (54)
dreamgarden, Here's an old NYT article I dug up from January 1981. It's discusssing the Feds policy changes during October 1979. It's a time I'll certainly never forget! In October 1979, I was at Notre Dame University attending my first American Bankers Association class of a 3-year program. We attended Notre Dame for a week's worth of intense classes & then peformed work at home for a year; then back to another university & another year of home assignments...then, one more year at another university followed by a presentation given at the end of our third year. Prime changed every few days...sometimes more frequently. We were studying the secondary market. Trading terminals had been set-up for our use. We were each given $1M of Monopoly money to trade with. Every single one of us was wiped out totally within TEN MINUTES because of the prime rate changes. It changed 3 or 4 times that day alone!! I was doing construction lending at the time. My borrowers paid a rate that floated over prime, usually 3%. I can clearly remember construction loan interest rates hitting 15%+. One of my builders told me it would be cheaper for him to build the house on his VISA card! He wasn't far wrong. Permanent mortgages were 12%+ on the open market. I had a subdivision to sell out in Thornton, CO of over 400 homes. We offered 'special' financing at 10.5% in an attempt to get those houses sold. I also remember the 1970's recession & gas shortage. My ex-husband & I took turns taking a day off work to wait in line for gas. I was in line at the station just off Alicia Parkway in Laguna Hills, CA mid-week...the line was probably 1/2 mile long. Suddenly, we all heard a sharp noise & knew immediately what had happened. Frustrations had reached critical mass & somebody had shot another person who had gotten gas just before the station owner put out the "No More Gas" sign. During the 1970's recession & housing bust...REITS failed by the hundreds & the market tanked. That's when I first learned about work-outs. The world is not ending today. We're going through a tough time, sure, but it's not time to buy wheat in 50 lb. buckets. The sun came up today & it will go down tonight right on schedule. In a few years you'll be looking back at this timeframe & remembering where you were when the Dow plunged. By the time you've been thru a few recessions they aren't as unnerving. Each has its own characteristics. IMO, this one will be remembered more for banking hitting the skids than subprime. Just like we remember the 1980's for the S&L crisis rather than the policy changes that precipitated the problems. Yes, I've assumed you've not been through many recessions. If you have & have been this skittish...I don't see how you've survived?? Deep breathes. This too shall pass. /tricia PS Your posts are very hard to read with all of those strange characters. How & why does that happen?
...See More
joyfulguy
Original Author
18 years ago
Hi again Sue,

Can one carry other than regular mutual funds in one's 401(k)?

Are there other tax-deferred retirement accounts which one can use that allow one to use other types of investment and which allow for employers' matching contributions of part of the invested amount?

I gather that one must pay tax on money before investing it into the Roth plan(s), but that tax is deferred ... (never payable? I doubt that) on the increase developed.

ole joyful
sable_ca
18 years ago
Joyful - There are no federal taxes on a Roth IRA, not on the profits, not on anything. Some profits may be taxed by the state. That's the beauty of the Roth. If you dip into your Roth before age 59 1/2, taxes and a penalty are due. And of course the Roth is only available with after-tax money, unlike the regular IRA. We rolled our regular IRAs into Roths about 8 years ago and had to pay the accrued taxes on profits, but now we are home free. IMHO it's a very good deal.

If you're interested in the details of how Roth IRAs are run, you could call Vanguard or Fidelity - the two largest brokerage houses in the US - and ask them to send you some literature.

401(k)s are only available through one's employer and what is there for investment depends on the employer - usually a selection of mutual funds, but it also could include the employer's stock.
azzalea
18 years ago
There are some serious aspects to consider.

On the tax deferred kinds of savings--who's to say the taxes won't go UP considerably before you start to collect on it (and truly--have you ever known taxes to go down? AND have you ever known the government to NOT take advantage of any taxable situation to the fullest?)

These funds are NOT in the investor's control. Once your money is in, you're allowing someone else to make decisions for you--and trusting that they're as concerned about your future as you are (unreasonable, right?). Not to mention--they aren't as safe as we've been led to believe. There are people already who have LOST their investments in these instruments. Not a common thing, but it is possible.

Lastly. And this is huge to use baby boomers. Congress has already discussed--several times--the possibility of denying social security to ANYONE who has one of these independent retirement accounts UNTIL they've used up their own money. So far, each time that's come up, it's been tabled, but as social security becomes more and more critical, as more and more of us boomers retire, it's a distinct possibility that something along those lines may be passed.

All that being said, I do have a small SEP account (similar type account for the self-employed)--but only took it out because one year I had a tax situation whereby if I hadn't opened the account, all the money would have gone to the gov. in taxes. It was a caculated gamble with money I wouldn't have had anyway. It's in a fund with an extremely good reputation and I can assure you--it's not doing much in this economy. There were a few years where it made good returns, but more where it just held it's own. It depends upon the market and as we all know, right now, that's NOT going to most of us rich overnight. But still, because this was money I wouldn't have had anyway, even if it were to totally disappear, I haven't lost a thing.

When those funds were first proposed, I knew they were a dangerous option. Almost everything I said at the time has come true to some extent.

Better by far, to educate yourself, and CONTROL your own retirement funds. (BTW--my own money, that in my control, grows far faster than the bit I've got stashed in that fund).
Chemocurl zn5b/6a Indiana
18 years ago
As sable said above, it is a choice if mutual funds offered under the 401k plan and often stock with the company (employer). When I was working, my employer contributed 50 cents for every dollar I chose to put into my 401k, up to 6% of my salary. Bingo...I immediately made 50% on my money, but there were stipulations. That 50% was not really mine until I had my account for 5 years I believe and became fully vested.
The 50% that they 'gave' me was in the form of company stock, GTE or Contel at the time.

These funds are NOT in the investor's control. Once your money is in, you're allowing someone else to make decisions for you--and trusting that they're as concerned about your future as you are (unreasonable, right?). Not to mention--they aren't as safe as we've been led to believe. There are people already who have LOST their investments in these instruments. Not a common thing, but it is possible.

Are you speaking of 401Ks? Did those who lost everything maybe choose to put all their eggs into one basket, by just holding company stock in their 401?...not a good thing at all.

All 401k that I know of, have a choice of investments to choose from...see link from my post above. The employee controls what funds their money is in within the 401, and can change the allocation at any time. Some employees just choose to do an equal mix of things...say 10 funds, putting 10% into each of them. Others maybe choose a 1/3 mix of aggressive, moderate, and conservative.

Placing one's savings, whatever it is, 401, sep, IRA, is not for those who do not understand the market and its many ups and downs. Because of that, some will lose sleep over what appears to be lost, even if it is just temporarily.

About 30 years years ago, I remember my (company) stock climbing a good bit in one day. I made $5,000 in one day! Boy was I ecstatic! When it later came down, did I lose money? No. Did I really make $5000 that day it climbed so much? No. I only would have made the money if I had chosen to sell it while it was up. It later came down some, went up some, came down some, etc, and has served me well to this day with its nice dividends. Often times one loses on a stock, or fund, if they choose or must sell when the market (stock or that fund) is down.

Sue
joyfulguy
Original Author
18 years ago
I react negatively to the idea of being in a position where I may have to sell when it doesn't suit me.

I prefer to be in the driver's seat rather than in the back seat and just along for the ride.

Taxi drivers like to get paid ...

... but when I ride a cab, I tell him where to go.

When I go where he chooses (even though he may know the city well) ...

... I may go to places that I don't like.

Or ... get the run-around.

ole joyful
monica_pa Grieves
18 years ago
Ed,
Your advice is often appreciated, but ...

I don't see an understanding of the US Tax laws regarding 401K investments in your argument, nor is there a full understanding of the various types of investment options or corporate contributions that are offered by many 401Ks.

As stated above, there are choices, and there are differences in performance by fund managers within Investment companies that offer corporate 401K plans.

Nor would I, a US citizen, advise on Canadian employer-offered investment plans or taxes.

Memo to participants/considerers of 401(k) investments

Comments (8)

glenda_al

Chemocurl zn5b/6a Indiana

Related Discussions

joyfulguy
Original Author

sable_ca

azzalea

Chemocurl zn5b/6a Indiana

joyfulguy
Original Author

monica_pa Grieves

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

Memo to participants/considerers of 401(k) investments

Comments (8)

glenda_al

Chemocurl zn5b/6a Indiana

Related Discussions

joyfulguyOriginal Author

sable_ca

azzalea

Chemocurl zn5b/6a Indiana

joyfulguyOriginal Author

monica_pa Grieves

COMPANY

BUSINESS SERVICES

GET HELP

CONNECT WITH US

joyfulguy
Original Author

joyfulguy
Original Author