MONEY 401(k)

How the Supreme Court Just Improved Your Retirement

The Supreme Court just ruled on an obscure aspect of ERISA. It could be great news for your retirement nest egg.

The Supreme Court just handed millions of retirement savers a helping hand.

You many not know much about ERISA, the body of rules that governs retirement accounts. But chances are you have a 401(k). That means Monday’s Supreme Court decision could indirectly lower investment fees you’re paying. And that’s great news.

On Monday the Supreme Court made it easier for 401(k) investors to sue employers over needlessly costly 401(k) investments. The actual point of contention in the case, known as Tibble vs. Edison, was pretty obscure. It involved how the statute of limitations should be applied to a breach of fiduciary duty.

But because ERISA law is so complicated, companies almost always choose to fight such suits on technical grounds. This time around, the typically business friendly U.S. Supreme Court decided in favor of investors, unanimously overruling the U.S. 9th Circuit Court of Appeals. As a result, employers will be forced to think a little harder about whether similar arguments are likely to prevail in the future.

But the fact is, employers have grown increasingly proactive about regulating plan fees. The reason: Tibble vs. Edison is just a high-profile example of a series of lawsuits launched in the past decade over employers’ failure to police exorbitant retirement plan fees. And many large employers have already reacted to the threat by urging investment firms to lower fees for their employees. As a result, 401(k) plan fees have come down, and investors have had greater access to low-cost options like index funds.

With the Supreme Court weighing in on investors’ side, you can expect that trend to continue.

 

MONEY stocks

14 Simple Ways to Be a Smarter (and Richer) Investor

brain made out of gold bars
Hiroshi Watanabe—Getty Images

Picking stocks is hard—and you still might not beat throwing darts at the stock pages. Here some easier ways to get yourself an edge.

1. Don’t pay 33% of your money in fees. Mutual fund charges look small, but the cost of paying an extra 1% a year in fees is that you give up 33% of your potential wealth over the course of 40 years. An index fund like Schwab Total Stock Market SCHWAB TOTAL STOCK MARKET SWTSX -0.21% can keep your expenses below 0.1%, compared with over 1% for many stock funds.

2. Mix your own simple plan. Four very low-cost index funds, recommended in the Money 50, deliver all the world’s major markets. (See graphic below.) The more aggressive you are, the more you can tilt toward stocks.

Source: MONEY research

3. Or pick just one fund. You don’t have to be fancy to be an effective investor. A classic balanced mix (about 60% stocks/40% bonds) provides plenty of equities’ upside, with less pain during crashes. The Vanguard Wellington VANGUARD WELLINGTON INV VWELX -0.3% balanced fund has earned an annualized 8% over a decade.

4. Or hire a robo-adviser. Outside of a 401(k), if you want a plan that’s more tailored to you, web-based automated investment services can put you in a mix of low-cost index funds and then rebalance as you go. Betterment and Wealthfront stand out as low-cost options, charging 0.35% of assets or less.

5. Patch the holes in a 401(k). Many workplace plans offer at least an S&P 500 or total stock market index fund as a low cost option for buying U.S. stocks. But if your plan doesn’t offer good choices in other asset classes, such as bonds and foreign stocks, diversify elsewhere. Save enough to get the company match. Then fund an IRA, where you can choose which bond funds or foreign funds to go with.

6. While you’re at it, dump company stock. About $1 out of every $7 in 401(k)s is invested in employer shares. But your income is already tied to that company. Your retirement shouldn’t be too.

7. Pick an asset, any asset. You can get into trouble by being too clever by half. The average investor has barely beaten inflation in the past 20 years as a result of buying trendy assets high and selling low. Forget all that. As the chart below shows, you’re better off buying and holding almost any major asset class.

Sources: Bloomberg, Morningstar, DalbarNotes: Returns are through Dec. 31, 2013.

8. Be patient with funds. Some well-known bargain-minded funds, such as Dodge & Cox Stock DODGE & COX STOCK FUND DODGX -0.02% , have struggled this past year. That doesn’t mean you should flee. True value funds refuse to buy popular—read expensive—stocks, so they often lag in frothy times. But over the past 15 years, Dodge & Cox has outperformed its peers by 2.5 percentage points a year and the S&P by more than four points.

9. Be stingy with funds. Cheapskates know index funds aren’t their only options. Actively managed blue-chip stock funds with an expense ratio of 0.35% or less have returned 8.5% over the past decade. That’s 0.5 percentage point better annually than the S&P 500. A great option: Vanguard Equity-Income VANGUARD EQUITY INCOME INV VEIPX -0.4% , charging 0.29%, has outpaced the market’s gains by 3.5 points annually over the past 15 years.

10. Rebalance? Maybe not. Routinely resetting your stocks and bonds to their original levels “is a nice idea in theory,” says planner Phil Cook. But “if you rebalance too often, you can give up a lot of potential returns.” In your twenties and thirties, when you’re almost all in stocks, you can skip it. As you age, though, gradually increase the frequency of rebalancing to every few years.

11. Break up with your high-cost adviser. Stock and bond returns are expected to be muted in the coming decade, so cutting advisory fees—often 1% of assets—matters. Vanguard Personal Advisor Services charges just 0.3% of assets. Some tech-based services, such as Betterment and Wealthfront, charge even less.

12. Put your portfolios together… If you hold a third of your 401(k) in bonds, your mix may be riskier than you think if your spouse is 100% in stocks. Coordinating also improves your options. If your spouse’s plan has a better foreign fund, focus your international allocation there.

13. …and your assets in the right place. Once you’ve maxed out your IRAs and 401(k)s, use taxable accounts for the most tax-efficient investments in your mix. They include index and buy-and-hold equity funds that trade infrequently and generate few capital gains distributions.

14. Take a fresh look at a classic. You’ve now built up enough assets that advisers will be eager to sell you clever ideas to beat the market. Before you bite, read the 2015 edition of A Random Walk Down Wall Street. Burton Malkiel has updated his skeptical investment guide to take on the latest new flavor, “smart” ETFs. If a fund has a greater return, says Malkiel, it’s probably because it’s taking on more risk.

Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

MONEY

Hate Your Company’s 401(k)? Here’s How to Squeeze the Most From Any Plan

squeezing orange
Tooga Productions—Getty Images

Four steps to getting your savings plan right—even if your employer didn't.

Your 401(k) plan is potentially one the best tools you have to save for retirement. You get a tax advantage and often a partial match from your employer. But let’s face it: Not all company plans have the most compelling investment options. These strategies will help you use your plan to maximum advantage.

Money

1. Plug the biggest hole in your account: Costs.

Mutual fund charges look small, but the cost of paying an extra 1% a year in fees is that you give up 33% of your potential wealth over the course of 40 years. If there’s at least a basic S&P 500 or total stock market index fund in your plan, that’s often your best option for your equity allocation. Some charge as little as 0.1%, vs. 1% or more for actively managed funds.

2. Look beyond the company plan.

If your 401(k) doesn’t offer other low-cost investment options, diversify elsewhere. First, save enough in the 401(k) to get the company match. Then fund an IRA, which offers similar tax advantage. You can then choose your own funds, including bond funds and foreign stock funds, to complement what’s in your workplace plan.

3. While you’re at it, dump company stock.

About $1 out of every $7 in 401(k)s is invested in employer shares. But your income is already tied to that company. Your retirement shouldn’t be too.

4. Share strategy with your spouse.

It’s a good idea no matter how much you like your plan: If you hold a third of your 401(k) in bonds, for example, your combined mix may be riskier than you think if your spouse is 100% in stocks. But coordinating also improves your options. If your spouse’s plan has a better foreign fund, you can focus your joint international allocation there.

Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

Read next: What You Can Learn From 401(k) Millionaires in the Making

MONEY

6 Things Millennials Should Do Now That Will Pay Off Big Later On

Try these tips for getting started when you have limited funds and lots to pay for

young hipster couple in apartment
Getty Images

Getting started as a saver and investor can be a tricky balancing act. You have bills to pay, student loans to settle, and a career to jump start. You have to create a cash cushion for emergencies at the same time that you are being urged to salt away money for a far-off retirement date. Here’s some smart advice on how set your priorities.

Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

  • 1. Tuck away a month of expenses.

    money tucked in mattress
    Steven Puetzer—Getty Images

    Even if this means paying off debt more slowly. The money can cover surprises like car repairs. Once you’ve hit that point, says financial planner Matt Becker, focus on the next goal: six months of expenses, to cover you should you lose a job.

  • 2. Juggle emergency saving and a 401(k) by playing it safe.

    Szefei Wong—Alamy

    Until you have six months’ liquid savings (see No. 1), investing isn’t a top priority. But you should put enough into a 401(k) to get an employer match. To partly reconcile the two goals, hold some less risky fare like bonds, says Lillian Wu of Research Affiliates. With taxes and penalties, cashing out a 401(k) is a last resort. But if you’re forced to do it, it’s better to have some safe money.

  • 3. Start first, be an expert later.

    pyramid of money on table
    Martin Poole—Getty Images

    Getting going on a 401(k) can feel like jumping into the deep end. How much in stock funds? What about bonds? But early on, saving at all matters more than picking the best mix. Say you put away 6% of your pay, with a 3% match, starting at 25. For 10 years you earn a lousy 2%, and then adjust your portfolio so that you earn 6% for the next 30 years. That wobbly first decade will still have added 47% to your total wealth by age 65.

  • 4. Begin your career in a wealth-building city.

    Indianapolis
    Katina—age fotostock Carmel, Indiana

    Zillow.com says these metros offer job growth above the median 1.3% and homes for less than the typical 2.9 times income:

    Dallas: Its many affordable ‘burbs include MONEY’s No. 1 Best Place to Live in 2014, McKinney.
    Job Growth: 3.3% Housing Cost: 2.5 x income

    Atlanta: Home to HQs of Fortune 500 companies including Coca-Cola and the United Parcel Service
    Job Growth: 2.4% Housing Cost: 2.7 x income

    Indianapolis: Metro boasts another Best Place: walkable, arts-rich Carmel.
    Job Growth: 2% Housing Cost: 2.4 x income

  • 5. Go ahead, have a latte.

    roommates in kitchen
    Bill Cheyrou—Alamy

    Reducing small expenses can’t hurt, but housing is where you can save real money when you’re young. Rent on a two-bedroom, with a roommate, can be 44% less than for a one-bedroom alone, according to Apartment List data.

  • 6. Spend money to invest in yourself too.

    student in computer lab
    Hill Street Studios—Getty Images

    Economists at the Federal Reserve Bank of New York have found that most Americans get their biggest raises during their first decade in the workforce. So lay the groundwork for wage growth early. Don’t be afraid to shell out some money for a business communication class, technology training, or an additional job certification, says Michael Kitces, co-founder of XY Planning Network, a group of planners with Gen X and Y clients. A $500 class that leads to a promotion and raise could pay off in compounding returns throughout your career, as future raises build on top of your higher base wage. “It may literally be the single greatest investment you can make,” says Kitces.

TIME

5 Money Habits of the Filthy Rich You Can Learn Now

How to save and invest your way to seven figures

Think it’s impossible to save a million bucks? It’s not. Fidelity Investments took a look at the 401(k) portfolios of its clients to see if those in the million-dollar-plus club have characteristics that make them stand out from the crowd.

Surprisingly, being super-rich wasn’t one of them. Although the average annual earnings of people with more than $1 million in their 401(k) was a substantial $359,000, Fidelity found that a number of these people had reported earnings of under $150,000.

As of the end of last year, more than 72,000 Fidelity clients had 401(k)s with more than $1 million in them — that’s more than double the number who had reached that monetary milestone just two years ago. Sure, investors across the board have benefitted from the stock market’s recovery, but the most retirement-ready people also displayed some specific saving and investing habits that helped them reach their goals.

They go slow and steady. “They really took a long term approach… took most of their careers to get there,” says Fidelity retirement expert Jeanne Thompson. The average age of Fidelity’s 401(k) millionaires is just under 60, and have been in the workforce for 30 years. It’s also worth noting that many of the people with the healthiest nest eggs also started saving for retirement early. “It’s not like it happened overnight,” Thompson says.

They max out their contributions. Fidelity found that million-dollar investors contribute roughly 14% of their income towards their 401(k)s — $21,4000 a year, on average. Now, this is above the annual amount workers under 50 are allowed to contribute — those workers are capped at contributing $18,000 a year in 2015 — but the average age of Fidelity’s million-plus 401(k) clients skews about 10 years higher than that. In other words, the most aggressive retirement savers seem to ramp up their contributions once they get the legal go-ahead to sock away more. By contrast, those with portfolios under $1 million contribute only $6,050 a year.

They don’t rely on target date funds. Target date funds have been pitched as a kind of “set it and forget it” option for investors, but a peek into the portfolios of the people who accrued $1 million or more shows that they don’t rely on them entirely or even primarily. As of the end of 2014, about 40% of these investors’ portfolios is in domestic equities, another 12% is in company stock and 6% is in foreign equities, on average. Only 10% of the average portfolio is allotted to target date funds.

They stay in equities. “To some extent, if you’re invested in cash you’re only going to have what you put in,” Thompson says. “Many people may be in retirement for 30 years or more,” she points out, so people might want to reevaluate if or when switching to a more conservative allocation is right for them. “As people are working longer and living longer, many will hold higher equity allocations,” she says. “You still have 30 years your money has to last…If you go too conservative too early you might not keep up with inflation.” On average, about three-quarters of the holdings of millionaire 401(k) clients are in equities — and remember, these are investors with an average age of around 60.

They don’t panic. “The key is when the markets go down not to panic,” Thompson says. Although it can be scary watching those numbers go down, selling at a loss only makes it harder to recover when the market eventually recovers. “They did bounce back, and so they’re were able, as equities rose, to ride the upswing,” Thompson says.

MONEY 401(k)s

How to Build a $1 Million Retirement Plan

$100 bricks and mortar
Money (photo illustration)—Getty Images(2)

The number of savers with seven-figure workplace retirement plans has doubled over the past two years. Here's how you can become one of them.

The 401(k) was born in 1981 as an obscure IRS regulation that let workers set aside pretax money to supplement their pensions. More than three decades later, this workplace plan has become America’s No. 1 way to save. According to a 2013 Gallup survey, 65% of those earning $75,000 or more expect their 401(k)s, IRAs, and other savings to be a major source of income in retirement. Only 34% say the same for a pension.

Thirty-plus years is also roughly how long you’ll prep for retirement (assuming you don’t get serious until you’ve been on the job a few years). So we’re finally seeing how the first generation of savers with access to a 401(k) throughout their careers is making out. For an elite few, the answer is “very well.” The stock market’s recent winning streak has not only pushed the average 401(k) plan balance to a record high, but also boosted the ranks of a new breed of retirement investor: the 401(k) millionaire.

Seven-figure 401(k)s are still rare—less than 1% of today’s 52 million 401(k) savers have one, reports the Employee Benefit Research Institute (EBRI)—but growing fast. At Fidelity Investments, one of the largest 401(k) plan providers, the number of million-dollar-plus 401(k)s has more than doubled since 2012, topping 72,000 at the end of 2014. Schwab reports a similar trend. And those tallies don’t count the two-career couples whose combined 401(k)s are worth $1 million.

Workers with high salaries have a leg up, for sure. But not all members of the seven-figure club are in because they make big bucks. At Fidelity thousands earning less than $150,000 a year have passed the million-dollar mark. “You don’t have to make a million to save a million in your 401(k),” says Meghan Murphy, a director at Fidelity.

You do have to do all the little things right, from setting and sticking to a high savings rate to picking a suitable stock and bond allocation as you go along. To join this exclusive club, you need to study the masters: folks who have made it, as well as savers who are poised to do the same. What you’ll learn are these secrets for building a $1 million 401(k).

1) Play the Long Game

Fidelity’s crop of 401(k) millionaires have contributed an above-average 14% of their pay to a 401(k) over their careers, and they’ve been at it for a long time. Most are over 50, with the average age 60.

Those habits are crucial with a 401(k), and here’s why: Compounding—earning money on your reinvested earnings as well as on your original savings—is the “secret sauce” to make it to a million. “Compounding gives you a big boost toward the end that can carry you to the finish line,” says Catherine Golladay, head of Schwab’s 401(k) participant services. And with a 401(k), you pay no taxes on your investment income until you make withdrawals, putting even more money to work.

You can save $18,000 in a 401(k) in 2015; $24,000 if you’re 50 or older. While generous, those caps make playing catch-up tough to do in a plan alone. You need years of steady saving to build up the kind of balance that will get a big boost from compounding in the home stretch.

Here’s how to do it:

Make time your ally. Someone who earns $50,000 a year at age 30, gets 2% raises, and puts away 14% of pay on average will have $547,000 by age 55—a hefty sum that with continued contributions will double to $1.1 million by 65, assuming 6% annualized returns. Do the same starting at age 35, and you’ll reach $812,000 at 65.

Yet saving aggressively from the get-go is a tall order. You may need several years to get your savings rate up to the max. Stick with it. Increase your contribution rate with every raise. And picking up part-time or freelance work and earmarking the money for retirement can push you over the top.

Milk your employer. For Fidelity 401(k) millionaires, employer matches accounted for a third of total plan contributions. You should squirrel away as much of the boss’s cash as you can.

According to HR association WorldatWork, at a third of companies 50% of workers don’t contribute enough to the company 401(k) plans to get the full match. That’s a missed opportunity to collect free money. A full 80% of 401(k) plans offer a match, most commonly 50¢ for each $1 you contribute, up to 6% of your salary, but dollar-for-dollar matches are a close second.

Broaden your horizons. As the graphic below shows, power-saving in your forties or fifties may bump you up against your 401(k)’s annual limits. “If you get a late start, in order to hit the $1 million mark, you will need to contribute extra savings into a brokerage account,” says Dirk Quayle, president of NextCapital, which provides portfolio-management software to 401(k) plans.

150320_MIL_LookBeyond
Money

2) Act Like a Company Lifer

The Fidelity 401(k) millionaires have spent an average of 34 years with the same employer. That kind of staying power is nearly unheard-of these days. The average job tenure with the same employer is five years, according to the Bureau of Labor Statistics. Only half of workers over age 55 have logged 10 or more years with the same company. But even if you can’t spend your career at one place—and job switching is often the best way to boost your pay—you can mimic the ways steady employment builds up your retirement plan.

Here’s how to do it:

Consider your 401(k) untouchable. A fifth of 401(k) savers borrowed against their plan in 2013, according to EBRI. It’s tempting to tap your 401(k) for a big-ticket expense, such as buying a home. Trouble is, you may shortchange your future. According to a Fidelity survey, five years after taking a loan, 40% of 401(k) borrowers were saving less; 15% had stopped altogether. “There are no do-overs in retirement,” says Donna Nadler, a certified financial planner at Capital Management Group in New York.

Even worse is cashing out your 401(k) when you leave your job; that triggers income taxes as well as a 10% penalty if you’re under age 59½. A survey by benefits consultant Aon Hewitt found that 42% of workers who left their jobs in 2011 took their 401(k) in cash. Young workers were even more likely to do so. As you can see in the graphic below, siphoning off a chunk of your savings shaves off years of growth. “If you pocket the money, it means starting your retirement saving all over again,” says Nadler.

150320_MIL_PlugLeaks
Money

Resist the urge to borrow and roll your old plan into your new 401(k) or an IRA when you switch jobs. Or let inertia work in your favor. As long as your 401(k) is worth $5,000 or more, you can leave it behind at your old plan.

Fill in the gaps. Another problem with switching jobs is that you may have to wait to get into the 401(k). Waiting periods have shrunk: Today two-thirds of plans allow you to enroll in a 401(k) on day one, up from 57% five years ago, according to the Plan Sponsor Council of America. Still, the rest make you cool your heels for three months to a year. Meanwhile, 40% of plans require you to be on the job six months or more before you get matching contributions.

When you face a gap, keep saving, either in a taxable account or in a traditional or Roth IRA (if you qualify). Also, keep in mind that more than 60% of plans don’t allow you to keep the company match until you’ve been on the job for a specific number of years, typically three to five. If you’re close to vesting, sticking around can add thousands to your retirement savings.

Put a price on your benefits. A generous 401(k) match and friendly vesting can be a lucrative part of your compensation. The match added about $4,600 a year to Fidelity’s 401(k) millionaire accounts. All else being equal, seek out a generous retirement plan when you’re looking for a new job. In the absence of one, negotiate higher pay to make up for the missing match. If you face a long waiting period, ask for a signing bonus.

3) Keep Faith in Stocks

Research into millionaires by the Spectrem Group finds a greater willingness to take reasonable risks in stocks. True to form, Fidelity’s supersavers have 75% of their assets in stocks on average, vs. 66% for the typical 401(k) saver. That hefty equity stake has helped 401(k) millionaires hit seven figures, especially during the bull market that began in 2009.

What’s right for you will depend in part on your risk tolerance and what else you own outside your 401(k) plan. What’s more, you may not get the recent bull market turbo-boost that today’s 401(k) millionaires enjoyed. With rising interest rates expected to weigh on financial markets, analysts are projecting single-digit stock gains over the next decade. Still, those returns should beat what you’ll get from bonds and cash. And that commitment to stocks is crucial for making it to the million-dollar mark.

MONEY money makeover

How to Save More While Earning Less

150306_POV_1
Leah Overstreet "Lately we're living from paycheck to paycheck," says Lonnie Roberts Jr. (right).

It sounds like a tall order, but these 4 fixes put one maxed-out family on the way to a more secure financial future—and they can help you, too.

As a navigation officer on boats carrying supplies to oil rigs in the Gulf of Mexico, Lonnie Roberts Jr. is experiencing the downside of falling fuel prices. As oil companies look to preserve profit margins, Lonnie’s employer cut back his pay 9% and eliminated the 4% match on his 401(k) in January.

Even before that, Lonnie, 47, and wife Shawn, 45, felt behind on retirement. Now the Cedar Park, Texas, couple are especially anxious, knowing they need to find a way to live on less while building up their $245,000 nest egg.

With Lonnie on a boat for weeks at a time, Shawn gave up her job as an aesthetician to be home with Adison, 13, and Aiden, 11. So the family lives on Lonnie’s now $127,000 salary, 7% of which goes into his 401(k) and 7% to buying company stock. After expenses, they don’t have much left over, and their credit card balances have grown to $9,700. Something has to give. “To retire in 20 years,” says Lonnie, “we know we need to make the right moves now.”

150306_POV_2

 

Here are four fixes that can help get them on the right track:

Free up cash. Chase Mouchet and Bryan Lee of Strategic Financial Planning of Plano, Texas, say the Robertses can trim $1,300 a month by eliminating impulse buys, putting off college savings, and being more economical. Also, Lonnie should sell his $3,700 in company stock, but keep buying at a 15% discount and selling right away (triggering almost no taxes) to generate $1,300 a year. Directing all this to the credit card, they should pay it off in five months.

Build in a cushion. Next priority: an emergency fund of five to seven months’ expenses. Shawn is considering returning to work part-time. If she does, the added income ($1,600 a month after tax) would help them hit the goal in another eight months.

Return to retirement. Lonnie and Shawn can then max out his 401(k) and two Roth IRAs. Mouchet and Lee also advise putting $500 a month in taxable investments. (College savings will have to wait until their pay rises.)

Boost returns. The Robertses have 80% of their nest egg in a variable annuity that’s grown just 2% total in 10 years, partly due to fees of 3% a year. Instead, the planners suggest transferring the money to a new IRA invested in low-cost index funds, with 70% in stocks, 20% in bonds, 10% in real estate. In sum, these steps should allow Shawn and Lonnie to retire at 65 and 67. Says Shawn, “It’s a relief to know we can do this.”

 

MONEY stocks

10 Smart Ways to Boost Your Investing Results

stacks of coins - each a different color
Alamy

You don't have to be an investing genius to improve your returns. Just follow a few simple steps.

Recent research shows that people who know their way around investing and finance racked up higher annual returns (9.5% vs. 8.2%) than those who don’t. Here are 10 tips that will help make you a savvier investor and better able to achieve your financial goals.

1. Slash investing fees. You can’t control the gains the financial markets deliver. But by sticking to investments like low-cost index funds and ETFs that charge as little as 0.05% a year, you can keep a bigger portion of the returns you earn. And the advantage to doing so can be substantial. Over the course of a career, reducing annual fees by just one percentage point can boost the size of your nest egg more than 25%. Another less commonly cited benefit of lowering investment costs: downsizing fees effectively allows you to save more for retirement without actually putting aside another cent.

2. Beware conflicted advice. Many investors end up in poor-performing investments not because of outright cons and scams but because they fall for a pitch from an adviser who’s really a glorified salesman. The current push by the White House, Department of Labor and Securities and Exchange Commission to hold advisers to a more rigorous standard may do away with some abuses. But the onus is still on you to gauge the competence and trustworthiness of any adviser you deal with. Asking these five questions can help you do that.

3. Gauge your risk tolerance. Before you can invest properly, you’ve got to know your true appetite for risk. Otherwise, you could end up bailing out of investments during market downturns, turning paper losses into real ones. Completing a risk tolerance questionnaire like this one from RealDealRetirement’s Retirement Toolbox can help you assess how much risk you can reasonably handle.

4. Don’t be a “bull market genius.” When the market is doing well and stock prices are surging, it’s understandable if you assume your incredible investing acumen is responsible for those outsize returns. Guess what? It’s not. You’re really just along for the ride. Unfortunately, many investors lose sight of this basic fact, become overconfident, take on too much risk—and then pay dearly when the market inevitably takes a dive. You can avoid such a come-down, and the losses that accompany it, by leavening your investing strategy with a little humility.

5. Focus on asset allocation, not fund picking. Many people think savvy investing consists of trying to identify in advance the investments that will top the performance charts in the coming year. But that’s a fool’s errand. It’s virtually impossible to predict which stocks or funds will outperform year to year, and trying to do so often means you’ll end up chasing hot investments that may be more prone to fizzle than sizzle in the year ahead. The better strategy: create a diversified mix of stock and bond funds that jibes with your risk tolerance and makes sense given the length of time you plan to keep your money invested. That will give you a better shot at getting the long-term returns you need to achieve a secure retirement and reach other goals while maintaining reasonable protection against market downturns.

6. Limit the IRS’s take. You should never let the desire to avoid taxes drive your investing strategy. That policy has led many investors to plow their savings into all sorts of dubious investments ranging from cattle-breeding operations to jojoba-bean plantations. That said, there are reasonable steps you can take to prevent Uncle Sam from claiming too big a share of your investment gains. One is doing as much of your saving as possible in tax-advantaged accounts like traditional and Roth 401(k)s and IRAs. You may also be able to lower the tab on gains from investments held in taxable accounts by investing in stock index funds and tax-managed funds that that generate much of their return in the form of unrealized long-term capital gains, which go untaxed until you sell and then are taxed at generally lower long-term capital gains rates.

7. Go broad, not narrow. In search of bigger gains, many investors tend to look for niches to exploit. Instead of investing in a broad selection of energy or technology firms, they’ll drill down into solar producers, wind power, robotics, or cloud-computing firms. That approach might work, but it can also leave you vulnerable to being in the wrong place at the wrong time—or the right place but the wrong company. Going broader is better for two reasons: it’s less of a guessing game, and the broader you go the lower your investing costs are likely to be. So if you’re buying energy, tech or whatever, buy the entire sector. Better get, go even broader still. By investing in a total U.S. stock market and total U.S. bond market index fund, you’ll own a piece of virtually all publicly traded U.S. companies and a share of the entire investment-grade bond market. Throw in a total international stock index fund and you’ll have foreign exposure as well. In short, you’ll tie your portfolio’s success to that of the broad market, not just a slice of it.

8. Consider the downside. Investors are by and large an optimistic lot, otherwise they wouldn’t put their money where their convictions are. But a little skepticism is good too. So before putting your money into an investment or embarking on a strategy, challenge yourself. Come up with reasons your view might be all wrong. Think about what might happen if you are. Crash-test your investing strategy to see how you’ll do if your investments don’t perform as well as you hope. Better to know the potential downside before it occurs than after.

9. Keep it simple. You can easily get the impression that you’re some kind of slacker if you’re not filling your portfolio with every new fund or ETF that comes out. In fact, you’re better off exercising restraint. By loading up on every Next Big Thing investment the Wall Street marketing machine churns out you run the risk of di-worse-ifying rather than diversifying. All you really need is a portfolio that mirrors the broad U.S. stock and bond markets, and maybe some international exposure. If you want to go for more investing gusto, you can consider some inflation protection, say, a real estate, natural resources, or TIPS fund. But I’d be wary about adding much more than that.

10. Tune out the noise. With so many investing pundits weighing in on virtually every aspect of the financial markets nearly 24/7, it’s easy to get overwhelmed with advice. It might make sense to sift through this cacophony if it were full of investing gems, but much of the advice, predictions, and observations are trite, if not downright harmful. If you want to watch or listen to the parade of pundits just to keep abreast of the investing scuttlebutt, fine. Just don’t let the hype, the hoopla, and the hyperbole distract you from your investing strategy.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY retirement savings

Borrowing From Your 401(k) Might Not Be Such a Bad Thing

carton of gold eggs, some are empty
GP Kidd—Getty Images

Most loans get paid back. It's cashing out that's the problem.

“Leakage,” using 401(k) or IRA savings to pay for anything other than retirement, has become something of a bad word in the personal finance world. One policy wonk, Matt Fellowes, the founder and CEO of HelloWallet, took the metaphor even further when he wrote that “the large rate and systematic quality of the non-retirement uses of DC [defined contribution] assets indicates that these plans are now being ‘breached.’ This is a massive systematic problem that now affects 1 out of every 4 participants, on average—which is more like a gaping hole in the DC boat than a pesky ‘leak.’

But leaks come in different shapes and sizes, and it turns out that some of them—such as taking loans from your own account, which you then pay back with interest—are less dangerous to your future financial security than others. Data from Vanguard shows that 18% of people participating in plans offering loans had a loan outstanding in 2013, and about 11% took out a new loan that year, which sounds like a very high rate. But the average loan was about $9,500 and most of it gets repaid, so it actually doesn’t represent a permanent drain on retirement savings. “Loans are sometimes criticized as a source of revolving credit for the young, but in fact they are used more frequently by mid-career participants,” note Alicia Munnell and Anthony Webb of the Center for Retirement Research at Boston College.

The real problem is what is known as a “cash-out,” when employees take a lump-sum distribution when they change jobs, instead of keeping their savings in their employer’s plan, transferring it to their new employer’s 401(k), or rolling it into an IRA. These cash-outs are subject to a 10% early withdrawal penalty (if you’re under the age of 59½) and a 20% withholding tax. Vanguard reports that 29% of plan participants who left their jobs in 2013 took a cash distribution. Younger participants with lower balances are more likely to cash out than older ones.

Equally risky, although more difficult to obtain, are “hardship withdrawals,” which allow 401(k) plan participants to access funds if they can prove that they face an “immediate and heavy financial need,” such as to prevent an eviction or foreclosure or to pay for postsecondary tuition bills. As with cash-outs, these withdrawals are subject to a 10% penalty as well as 20% withholding for income tax. (You can take a non-penalized withdrawal if you become permanently disabled or to cover very large medical expenses.) Employees must prove that they’ve exhausted every other means, including taking a loan from their 401(k). The rules governing IRAs are much more relaxed and include taking penalty-free withdrawals of up to $10,000 to buy, build, or rebuild a first home or even to pay for medical insurance for those unemployed for 12 weeks or more—situations one might argue it would be better to have established a six-month emergency or house fund to cover instead of taking from your IRA.

Policy watchers such as Munnell and Webb recommend tightening up regulations to reduce leakage, arguing in particular that allowing participants to cash out of 401(k)s when they change jobs is “hard to defend” and that the mechanism could be closed down entirely by changing the law to prohibit lump-sum distributions upon termination. It would also make sense to make the rules for withdrawals from IRAs as strict as those from 401(k)s, since more and more assets are moving in that direction as people leave jobs and open rollover IRAs.

But perhaps the biggest lesson of leakage is that if people are reaching into their retirement funds to pay for basic needs such as housing or health insurance, they may be better off not participating in a 401(k) until they have enough emergency savings under their belt. Contributing to a retirement plan is important, but not if you turn your 401(k) into a short-terms savings vehicle and ignore basic budgeting and emergency planning.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

businessman putting money into his suit jacket pocket
Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

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