MONEY Ask the Expert

Help, My Spouse Is Afraid of Stocks. What Should I Do?

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Robert A. Di Ieso, Jr.

Q: I just got married, and my husband and I are both contributing to 401(k)s. But he is very conservative with his investments and keeps very little in stocks. We have more than three decades till retirement. How can we align our 401(k)s so we both feel comfortable?

A: It’s certainly not unusual for a couple to have different attitudes about how to manage their money. Spouses often aren’t on the same page when it comes to personal finances. But when you are investing for retirement, being too conservative can make it harder to reach your long-term goals.

“You need some of the risk that comes with investing in stocks, or you won’t have enough growth to fuel your portfolio for the long run,” says San Diego financial planner Marc Roland. And the younger you are, the more risk you can afford to take with your retirement money.

That’s because you have more time to ride out the anxiety-inducing downturns in the markets. Financial planners recommend using your age and subtracting it from 110 to get the percentage of your portfolio that you should keep in stocks. A 30-year-old, for example, should have roughly 80% of their holdings in equities.

So how do you mesh that guideline with an asset allocation that doesn’t panic your husband when the market drops?

First, understand that asset allocation isn’t the only important factor you should consider. How much you put away has more impact on your retirement savings success than how you invest your money. When you’re decades from retirement, it’s hard to know exactly how much you’ll need for a comfortable lifestyle at 65. But one rule of thumb is that you’ll need 70% of your pre-retirement salary to live comfortably. You can get a good ball park estimate with a calculator like this one from T. Rowe Price.

The more you are contributing to your 401(k)s, the less risk you have to take on, says Roland. If you’re both saving at least 10% of your income, and you boost that rate to 15% or more as you get older and earn more, a balanced portfolio of about 60% in stocks with the rest in bonds would work, says Roland. (That ratio of stocks to bonds is a bit conservative for investors in their 20s, who could reasonably stash as much as 80% in equities.)

To achieve that overall mix, the more aggressive spouse can invest 80% in stocks, while the risk-averse spouse can hold the line at 40%, assuming you are contributing similar amounts to your plans. “That blend will give them an appropriate asset allocation but each portfolio is tailored to each person’s risk tolerance,” says Roland.

Related links:

MONEY Ask the Expert

Do I Owe Taxes on a Windfall from a Retirement Plan?

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Robert A. Di Ieso, Jr.

Q: I am the beneficiary of a $15,800 death benefit from my dad’s pension plan. I was under the assumption that I would not be taxed on it, but is that the case? I want to make sure I deduct any taxes before I distribute the money to my siblings. —Tanya, White Plains, N.Y.

A: The answer depends on the source of the death benefit. If the payout is in the form of a life insurance policy—what your case sounds like—you won’t owe any taxes on the $15,800.

But the tax consequences would be different if you had inherited a tax-deferred retirement plan, such as a 401(k), says Charlotte, N.C. financial planner Cheryl J. Sherrard. The money in that kind of plan is taxed only when the owner makes a withdrawal. As an heir, you would owe income taxes on any distributions.

When you inherit a retirement account, you have few payout options. You can take the full amount in a lump sum, which could push you into a higher tax bracket if the windfall is significant. If you do that, you can request federal and state tax withholding when you fill out the distribution paperwork. Or you can ask for the full amount and pay the taxes later.

To spread the distributions over several years, you can open what’s called an inherited IRA and then move the retirement plan assets into this new account (assuming the qualified retirement plan allows you to). You generally have to start taking annual distributions no later than Dec. 31 following the year of the original account holder’s death. Since the rules are tricky, talk to a tax professional, advises Sherrard.

In this case you would either be gifting a small amount to your siblings yearly, or the full amount all at once. But keep in mind that as a sole beneficiary you are not required to give any money to them.

And no matter what, don’t rush to share your inheritance until you have the full picture of what your father left behind.

“You may want to wait until any other assets of your father’s have been split among all siblings, and then if you desire to equalize with them, you can do so via that net retirement money,” says Sherrard. “This is a common gotcha when one child inherits a taxable asset and then needs to take taxes into consideration before splitting it up.”

Have a question about your finances? Send it to asktheexpert@moneymail.com.

 

MONEY 401(k)s

Get the Most From Your 401(k) at Any Age

To get the most out of your retirement savings, put the right amount in and take the right steps at all stages of life. Here's some advice to follow, whether you're just starting out or further down your career path.

 

Millennials

Millennials Start small, then auto-escalate. Less than half of workers ages 22 to 32 are saving for retirement, despite how painless it can be. Socking away 3% of a $50,000 salary ($1,500 before taxes) costs you less than $22 a week in take-home pay. Then take baby steps by auto- escalating your savings by one percentage point a year. In plans with auto-enroll and a 1% auto-escalate feature, nine in 10 participants are able to safely generate 60% of their age-64 income, adjusted for inflation, according to EBRI.

Take the easy way out. More than two in five millennials in retirement plans aren’t familiar with their investment options. No problem: Just go with a target-date fund, which automatically adjusts your portfolio to be less risky as you age. The worst-performing target-date investors at Vanguard earned 11.8% annually over the past five years, far outpacing the worst DIYers, who gained just 2.1%.

Roll over as you go. Twentysomethings typically spend 1.3 years at each job. And Fidelity says nearly half cash out 401(k)s when leaving. That triggers income taxes and a 10% penalty, depleting the amount that can compound. The box shows what that really costs you.

Gen Xers

Gen Xers Keep the bottom line top of mind. A funny thing about investing: The more you save and the bigger your balance, the more fees you have to pay in dollar terms. So now that your account has some serious money, shifting to lower-cost options such as an index fund is an easy way to save big (see chart). If you have $100,000 saved by 40 and underlying returns average 7%, the savings by 65 of switching from a 1.2%-fee fund to 0.3% is $102,000—nearly a whole second nest egg.

Shoot for 17%. How much you need to save depends on how much you already have. But 17% is a good mental anchor. That’s the number Wade Pfau of the American College of Financial Services came up with for folks starting from scratch at 35, with a 60% stock/40% bond portfolio, to safely fund a typical retirement goal. You might be okay saving less if the markets go your way, but Pfau’s number is what it takes to get there even with poor returns. That’s far more than the average 401(k) contribution of around 6% to 7%. But take a deep breath. That number includes the contributions from your employer.

Resist the urge to borrow. About 22% of participants between 35 and 54 in plans run by ­Vanguard have borrowed from their retirement accounts. Compared with other forms of debt, a 401(k) loan isn’t the worst. But the amount that you borrow is money that’s not compounding tax-deferred.

Baby Boomers

Baby Boomers Save in bursts. Neither saving nor spending runs along a smooth path. For example, you may have to pare back savings while paying the kids’ college bills. The good news is that “after 50 is when people should be able to save the most, as their kids are moving out, they’ve paid off the mortgage, and they should be in the highest earnings years of their lives,” says economist Wade Pfau. Starting at 50, you can also make extra 401(k) contributions of up to $5,500, on top of the normal $17,500.

Prep for the spend-down phase. Once you retire, you’ll have to spend out of your nest egg regardless of market conditions. Even if stocks do well on average, a bad run early on can deplete your portfolio. So “start taking a couple percent of equities off the table every year in the five or 10 years leading up to retirement,” says financial adviser Michael Kitces.

Readjust your target. According to polls, Americans expect to retire around 66. But the actual age of retirement is 62. Things happen: You may run into health issues or be forced into early retirement. Now many 401(k) savers use target-date funds. As you gain more visibility on your own retirement date, adjust the ­target-date fund you use. As the chart shows, it can make a big difference. Notes: Cash-out growth assumes a 5% annual return. Fee calculations are based on total costs, including forgone gains. sources: Morningstar, T. Rowe Price, SEC, MONEY research

TIME Retirement

Americans Are Totally Unprepared for This Shock

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Simon Critchley—Ikon Images/Getty Images

Never mind saving for retirement: Americans today face the bleak prospect of poverty in their golden years because they have no idea how much nursing homes cost and they wildly underestimate how much they’ll need.

In a new survey by MoneyRates.com, 40% of respondents say they’ve set aside nothing — zilch — towards paying for the care they’ll most likely need in their final years.

“Over two-thirds of individuals who reach age 65 will need long-term care services during their lifetime,” the Centers for Disease Control and Prevention warns.

Two-thirds of survey respondents have less than $75,000 saved. More than half think $75,000 is more than they’ll need for a year in a nursing home, but they could be in for a rude awakening: The average cost for a semi-private room in a nursing home is more than $81,000 a year, and that can soar to nearly $142,000 in pricey locations like New York City.

“It’s scary how quickly nursing care can run through your savings,” says Richard Barrington, senior financial analyst for MoneyRates.com. Barrington says even people who think they’re being diligent about saving for their retirement years can be led astray by the assumption that they’ll be able to live on less money after they exit the workforce.

“You may have a fair amount of discretion in the early years of your retirement, but then your financial needs may accelerate sharply,” he says. “People need to plan their savings and conserve their resources accordingly.”

A new brief from Boston College’s Center for Retirement Research illustrates what happens when people fail to plan for this possibility. It finds that even high-income retirees run out of money and need to use Medicaid to cover nursing home care.

“Medicaid… serves not just the poor, but also relatively well- off retirees impoverished by costly medical expenses,” the brief says, an outcome that has serious implications not just for these people, but for their heirs.

The eligibility rules for Medicaid are strict, with a cap of only $2,000 on what are termed “countable assets” and a five-year lookback period that essentially forces people to burn through the wealth they’ve accumulated. The government says about half of people who enter nursing homes start off paying for it themselves, but many of them spend down their assets — leaving little or nothing for their heirs — and end up on Medicaid.

The Boston College researchers looked at single seniors by income group as they aged and tracked who was covered by Medicaid. While Medicare covers all Americans once they hit the age of 65, the coverage doesn’t cover long-term care like nursing homes. For people without enough savings or who didn’t plan ahead and take out a long-term care insurance policy, the high cost of nursing homes can force even well-off seniors into poverty, at which point they’re eligible for Medicaid, which does cover nursing home care.

Although the percentage of high-income elderly who get Medicaid assistance starts out at zero when they’re 60 years old, it climbs steadily as they age, and around 20% of this population needs and qualifies for Medicaid by the time they hit their late 90s. “Higher income retirees… tend to live longer and face higher medical needs in very old age, which can result in them ending up on Medicaid,” the brief says.

Granted, many don’t live that long, but Americans are experiencing longer retirements and life spans. The CDC says the number of people 85 and older will rise from about 6 million in 2015 to almost 18 million by 2050.

“Medicaid is a safety net and it’s great that it’s there, but… you have to understand it’s likely to limit your options,” Barrington says. “If you want to leave behind any kind of legacy to your heirs or to charity, if you end up going on Medicaid, you can essentially forget about it.
A 2012 study by the Employee Benefit Research Institute found that people who lived in a nursing home for six months or more had median household wealth of only about $5,500. “For nursing home entrants, median housing wealth falls to zero within six years after the initial nursing home entry,” the study says.

“That safety net does come with strings attached,” Barrington cautions. “It’s going to sharply limit what you’re able to pass on.”

MONEY Ask the Expert

What’s the Tax Impact of Gifting Money from a 401(k)?

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Robert A. Di Ieso, Jr.

Q: My sister has cashed out her 401(k) and wants to give it to me as a gift. How will this affect us tax-wise? The amount is about $14,000. —Beverly, Benton, Ark.

A: Lucky for you, there will be no tax ramifications to you for accepting the gift. But your sister will have to square up with the IRS.

Because your sister cashed out her 401(k), she will owe income taxes on the total amount withdrawn, says St. Petersburg, Fla. financial planner Helen Huntley. If she was younger than 59½ when she pulled the money out, she will also be hit with an additional 10% early withdrawal penalty.

Keep in mind that while your sister probably won’t owe gift tax—$5.34 million in property can be transferred tax-free over one’s lifetime—she may need to inform the IRS. Each year, you’re allowed to give up to the annual gift tax exclusion limit (this year $14,000 per person, though a married couple can double that) without reporting the transfer of funds to the IRS. Above that, the gift giver will need to file a form 709, and the gift will be subtracted from their total lifetime gift and estate tax exclusion.

MONEY Ask the Expert

Should I Be More Hands On With My 401(k)?

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Robert A. Di Ieso, Jr.

Q: I am in my mid-30s and I am hands off with my 401(k). Should I be more active with the funds my 401(k) is plugged into? – William E. Collier

A: When it comes to 401(k) plans, inertia tends to rule—many people never revisit their initial investment choices after enrolling. It’s important to keep tabs on your plan and to make a few tweaks occasionally. But whether you should be a lot more active depends on how comfortable you are managing your own investments.

Most 401(k)s offer low-cost core stock and bond funds, including index options. If you are familiar with the basic rules of asset allocation, you can easily build a diversified, inexpensive portfolio on your own. But recent research makes a good case that getting some professional help with your portfolio can boost returns.

Pros may not outsmart the market, but they can often save your from your own worst instincts—taking too much or too little risk, or changing your investments too frequently. As a recent study by consultants AonHewitt and advice provider Financial Engines found, investors who followed their plan’s financial guidance earned median annual returns that were 3.3 percentage points higher than do-it-yourselfers, net of fees. The study analyzed the returns between 2006 and 2012 for 723,000 plan participants, including investors in target-date funds and managed accounts, those using the plan’s online tools, as well as do-it-yourselfers.

A three percentage point gap is substantial. A do-it-yourselfer who invested $10,000 at age 45 would have $32,800 by age 65; by contrast, the average 401(k) saver using professional advice would have $58,700 at age 65, or 79% more, the study found.

Another analysis by investment firm Vanguard found a smaller difference in returns for those who got help vs. those who didn’t. Target-date investors earned median annual returns of 15.3% vs. 14% for those managing on their own. The do-it-youselfers also had a wide range of outcomes, with the 25% earning median annual returns of less than 9%.

These days more plans are providing guidance in the form of online tools and target date funds: 72% of 401(k) plans offer target-date funds, up from 57% in 2006, according to the Investment Company Institute. The Plan Sponsor Council of America found that 41.4% offered some kind of investment advice in 2013, up from 35.2% the previous year.

Taking advantage of this help can be a smart move. But if you opt for a target-date fund, be sure that you use it correctly—as your only investment. Adding other funds will throw off what’s designed to be an ideal, all-in-one asset mix. Unfortunately, nearly two-thirds of target-date fund users put only some of their money in one, while spreading the rest among other investments. That move may lower your median annual returns by 2.62 percentage points, the study found, compared with investors who put all their money in a single target-date fund.

If you decide to go it alone, make sure to build your own ideal portfolio mix—try Bankrate’s asset allocation tool. To minimize risk, rebalance once a year to prevent any one allocation from getting too far out of whack. As you near retirement, remember to ratchet down the risk level in your portfolio by shifting to more conservative investments, such as bonds and cash.

Make these few moves, and you won’t get left behind by being hands on.

MONEY 401(k)

The Three 401(k) Moves Boomers Should Make Now

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Make sure your investment plan still fits your life. John Rensten—Getty Images

You're starting to get a handle on what your retirement will look like. Adjust your portfolio to protect it.

By now you should have the basics of your retirement strategy in effect. You’ve salted away a decent chunk of change and invested in a diversified group of funds. Hopefully, you’ve even gotten the hang of dealing with some market ups and downs, and settled on a mix of stocks and bonds you feel comfortable with. But as you close in on your retirement date, there are some new complications to consider. And some opportunities, too. Let’s start with the good stuff:

1. Look for savings boosters

As you’ve no doubt learned over the years, neither saving nor spending runs along a smooth path. Expenses spike when you need that new minivan or you’re paying tuition bills, and may then tail off once the offspring strike out on their own. Whenever money frees up, you can plow that money into extra savings.

You’d be surprised how you can make up for lost ground. For example, say you’re 50 with $350,000 socked away, make $70,000 a year, save at a 10% annual clip, and earn 5% annual investment returns. Let’s say for a brief window of time, when junior is at college racking up tuition bills, you have to drop that savings rate down to 5%.

It’s not the end of the world, as long as you commit to boosting your savings when cash frees up. For instance, if you were to drop your savings rate to 5% during those college years, but then boost it to 15% starting at 55 (when junior has graduated), and then to 25% starting at age 60 (perhaps when the mortgage is paid off), you’d wind up with $980,000 by age 65. That’s actually slightly more than the $916,500 you would have amassed by simply sticking to that 10% annual savings rate all along.

Remember too that starting at age 50, both you and your spouse can make extra catch-up 401(k)s contributions of up to $5,500, on top of the normal $17,500.

2. Prep your portfolio for the spend-down phase

As you get nearer to your retirement date, you have to start thinking about your investments differently. Earlier in your career, market losses hurt, but they were buffered by the fact that you still had many years of earnings ahead. You were replenishing your portfolio even as it fell.

Once you enter retirement, the rules are different. You’ll have to spend out of your nest egg whether your portfolio is up or down. That means that even if stocks do well on average during the time you are retired, a bad run early on can deplete your portfolio quickly. In that case, a later market rebound may not help much. Consider this (partly) hypothetical example. The “bad years early” example is what actually would have happened to someone with the bad luck to retire in 1971. The portfolio taps out in less than 25 years.

NOTE: Assumes initial withdrawal adjusted for inflation. Based on a 60% stock portfolio. SOURCE: Morningstar

The happier result, “bad years late,” is the same set of returns, just reversed so that more bull years come first. The moral of the story: Your retirement outcome will depend a lot on whether you have good luck or bad luck in the years just before and just after your retirement.

You can’t control what the markets will look like when you retire. But before you get there, you can prepare your portfolio by making sure a decent chunk of your nest egg is in safer assets such as bonds or cash.

3. Make sure your investments and your career are in sync

When you set your retirement plan in motion, you may have had certain expectations about when you’d retire. According to polls by Gallup, Americans expect to retire around age 66, reflecting a general trend toward later retirement. Here’s the thing: The actual age of retirement is only about 62. (That’s up from 59 in 2004.) Things happen: You may run into health issues, or find yourself forced into early retirement as your company downsizes. In your late 50s or early 60s, you probably will start to get a good sense of whether you’ll have to reset your planned retirement date. Don’t forget to reevaluate your plan accordingly. An earlier retirement means you’ll want to shift into safer assets more quickly.

Many 401(k) savers these days use target-date funds, premixed portfolios of stocks and bonds which lower their equity exposure as you approach a retirement date. If you’ve reset your retirement expectations, you should switch target date funds too. It can make a difference:

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SOURCE: T. Rowe Price

The popular T. Rowe Price Retirment fund meant for people aiming at a 2020 quit date has almost 10% more of its assets in stocks than the one for those retiring just five years sooner. Other target retirement funds in 401(k) plans have similar features. Even if you prefer to keep your investments on autopilot, sometimes you have to step in to correct course.

MONEY

Closing Out Your Old 401(k)

Q: I got a check closing out my old 401(k). Can I add it to my new 401(k) without penalty? — Matt Gould, New Cumberland, Pa.

A: Yes, and act fast.

Unless you put the money in another retirement account within 60 days of receiving the check, you’ll owe taxes on the sum, plus a 10% early-withdrawal penalty if you’re not yet 59½, says John Piershale, a financial planner in Crystal Lake, III.

Related: Will you have enough to retire?

One hitch: The old plan usually withholds 20% of your account for taxes, so when you make the deposit you’ll have to use other cash to cover that 20% shortfall.

Assuming you get this done within 60 days, you’ll get the withheld money back at tax time.

If your new 401(k) plan doesn’t accept rollovers or will make you wait too long to deposit the funds, put the money in an IRA, advises Lancaster, Pa., planner Rick Rodgers. You can always move it into a 401(k) later.

MONEY

American Airlines Employees Grounded from Trading 401(k) Funds

American Airlines pilot Jim Irvine's aggressive 401(k) trading style cost him access to some of the plan's highest-performing funds. Photo: Pat Molnar

Jim Irvine had his compass set on an ideal retirement. With two generous pensions and a 401(k) that he maxed out every year, the American Airlines pilot had been on track to retire by 60 and live out his dream of sailing around the world with his family.

Then a fierce squall hit: AA filed for bankruptcy in 2011. Subsequently one of his pensions was frozen, the other paid out. Suddenly Irvine’s retirement dream hinged entirely on his growing his 401(k).

“It’s all up to me to invest well,” says Irvine, now 48.

Not surprisingly, people who fly aluminum canisters at nearly the speed of sound 40,000 feet above the earth tend to be fairly confident. “We’re goal-oriented, take-charge guys,” says Irvine. So rather than buying mutual funds to hold for the long haul, he responded by ramping up his already aggressive trading style in hopes of growing his money faster.

Irvine took most of his cues from a newsletter called EZ Tracker that he had begun subscribing to a few years earlier. The newsletter had reported solid returns, and Irvine loved the convenience. He could easily follow EZ Tracker’s recommendations — making about two dozen trades a year, including a few of his own — and not give up much of the free time between flights that he’d rather spend with his wife, Lisa, and four young kids (ages 4 to 8) in Cleveland.

Related: What’s your money state of mind?

He didn’t pay much attention to his returns as his balance rose, and he had no idea that trading activity was attracting attention of its own. The first indication of this came in 2012, when he got a warning letter from his 401(k) administrator saying his trading activity was “disruptive” to the T. Rowe Price funds in his plan. Undeterred, Irvine continued to buy and sell on EZ Tracker’s advice — until January 2013, when a second letter informed him that he was prohibited from trading into any of the plan’s four T. Rowe funds for a full year. “I couldn’t believe they actually did it,” he says. “It was like one of my kids throwing a tantrum.”

He wasn’t the only one to get such a letter. From 2011 to 2013, some 1,300 AA employees were barred from trading into T. Rowe funds in their 401(k) plans — some for a year, some for life. Vanguard recently acknowledged that it’s had a similar issue with airline workers: For years, the company says, it’s been telling Southwest to inform its staffers that their purchases could be blocked if they trade on the advice of investing newsletters.

A strange set of cases, yes — but you may have more in common with these highflying investors than you think. While only 15% of 401(k) participants in the U.S. initiated a trade in 2012, according to benefits firm Aon Hewitt, nearly a third of MONEY readers polled made more than five trades last year, and 17% made more than 10.

Related: How to get in trouble in your 401(k)

Even if you’re not trading as often as the newsletter subscribers, you’re hardly immune to the pressures that drove them to do so. The percentage of Americans enrolled in traditional pensions is now only 14%, down from 38% in 1979, according to the Employee Benefit Research Institute, leaving workers increasingly reliant on 401(k) savings. And most are falling behind, countless studies show.

So is it really all that wrong that these airline workers took their plans off autopilot in hope of getting a boost? The fund companies argue that it is, since the kind of trading they’re doing can hurt long-term investors (that is, most of you reading this). Meanwhile, subscribers contend they should be able to invest any way they please. But they’re missing a more important point: Frequent trading probably won’t give them the lift they’re hoping for. “The terrible irony,” says Frank Murtha, co-founder of MarketPsych, a behavioral-finance consulting firm, “is that by trying so hard to achieve superior returns, you virtually ensure that you will underperform.”

Where the trouble began

The curious tale of AA trading bans starts in 2002 with two men: Mike DiBerardino, then an AA pilot, and Paul Burger, who’d just left his job as COO of an ad agency in Philly. The pals had met while working as securities dealers in the ’70s.

Long after changing careers, DiBerardino often found himself advising his airline colleagues on retirement investing. “I’d show them what I was doing, and they’d say, ‘Send me that!’ ” he recalls. After he mentioned this to Burger, the two hatched a plan for a newsletter aimed at helping AA employees pick funds in their 401(k). Thus was born EZ Tracker.

Today the AA newsletter has more than 3,000 subscribers, and EZ Tracker’s publishers — who both work at it full-time since DiBerardino’s retirement in 2007 — also produce separate editions for employees of Southwest, JetBlue, United, and US Airways, as well as for pilots of UPS. For pilots, a one-year subscription costs $100; for flight attendants, $85.

On the last Sunday of every month, subscribers get an email containing a link to the newsletter. Each issue offers a market overview, news on plan changes, and, of course, investment picks. Readers can model their investments on one of three portfolios — aggressive, moderate, and conservative — each consisting of about six to eight funds from the plan’s offerings (which, in AA’s case, number 30). And every month the newsletter recommends a handful of trades.

While DiBerardino and Burger don’t like the terms “market timing” or “momentum investing,” their advice is essentially that: They suggest buying funds that have performed well over the past 12 months and selling those that are cooling off. To make picks, they look purely at price, rather than the fundamentals of the underlying holdings. They also employ a basic asset-allocation strategy to ensure a diverse mix.

EZ Tracker’s publishers are not registered investment advisers. They also acknowledge that they are not offering anything the airline employees couldn’t find out for themselves. But they say they save workers time by doing the research.

“We’re not gurus,” says Burger. “There is no crystal ball. We don’t know where the market is going, but we can tell you what are the best-performing funds right now.”

Their results, which aren’t audited by any third party, certainly look impressive. Over the past 10 years EZ Tracker reports an annualized return of 10.7% in the AA aggressive portfolio, compared with 7.4% for the S&P 500. The newsletter’s hallmark year — and the year after which subscriptions “took off,” the founders say — was 2008, when the aggressive portfolio fell just 14.6%, vs. the S&P 500’s 37% plunge.

Why airline employees bit

Some time after the debut of EZ Tracker, its publishers noticed the appearance of a competitor called 401k Maximizer, that is today targeted at employees of AA, Southwest, US Airways, and Delta. (The publication’s founder, who’s been reported to be an AA pilot, did not respond to requests for comment.)

Mark Hulbert, who as editor of the Hulbert Financial Digest has studied the investing newsletter industry for three decades, says it’s unusual to see a publication focused on one company’s retirement plan because it limits the audience. Yet the airline industry seems to be able to support not one but two newsletters for active 401(k) traders. How come?

Ego is probably one factor. People in high-achieving fields like aviation often have the kind of type A personality that makes them think they can beat the market by trading, says MarketPsych’s Murtha. He points to a 2011 study by the University of California showing that investors with an inflated sense of their abilities tend to trade more.

Related: How we feel about our finances now

Mike Close, a Southwest pilot from Cape Canaveral, Fla., agrees with Murtha’s assessment of his peers: “We all know how to solve the world’s problems — we know the answer to everything,” jokes Close, who has subscribed to 401k Maximizer for six years and was among those who received a warning from Vanguard. “This makes a pilot a horrible person to take advice from, especially investment advice,” he adds. (Nevertheless, he says, he’s been happy with how he’s done with Maximizer.)

Meanwhile, a culture of trust and conformity may make pilots more inclined than others to put blind faith in advice from a peer, says Andy Simonds, a pilot for a major airline and a writer for Future & Active Pilot Advisors, a career and financial advisory service. Because they must entrust their lives to co-pilots who can be strangers, he says, it follows that they’d trust colleagues with lesser decisions, like investing.

The reasons Brigitte Laurent, 49, an AA flight attendant from Playa del Rey, Calif., started subscribing to EZ Tracker eight years ago could apply to anyone. Until co-workers suggested she try the newsletter, she had her whole nest egg in a single index fund. “But I always felt like I could do better, like I was missing out,” she says. “I feel like I’m more in control now, even though I’m following their advice.” And after the AA bankruptcy froze her pension, cut her pay, and cost her vacation days, the 25-year vet of the airline says she needed that sense of stability more than ever.

Sometimes when feeling out of control, we reach for a narrative that will help us feel like we’re in the driver’s seat, says Dan Ariely, a leading behavioral economist, whose latest book is The (Honest) Truth About Dishonesty. “We don’t like randomness,” he adds. “We try to force order on life around us, so we tell ourselves a story.”

The story the newsletters tell is that by trading you can beat the market. Our neurons compound the problem: Studies have shown that the pleasure centers in our brains are activated more when we do something to earn money rather than passively receive it. Add in diminished expectations — such as those following the market plunge, pension cuts, and pay freezes suffered by AA employees — and the temptation to act gets even stronger. “When people expect to achieve a certain level of wealth, they can get emotionally anchored to it,” says Murtha. So when your actual wealth falls below where you think it should be, you can get an itch to do something to rectify the situation.

But with investing, as with flying, our instincts can be wrong, warns William Bernstein, the neurologist-turned-investment-guru who also has a pilot’s license. “When a pilot comes in for a landing while flying slowly and descending rapidly, the instinct is to pull the nose up, but you actually need to point it to the ground to get enough airspeed to fly again,” he says. “Investing is the same way: We instinctively react to danger with fight or flight, which is a useful instinct in nature but all wrong in finance. You shouldn’t sell when the fund goes down; you should hold on and do nothing.”

Why they were banned

Cole Seckman, 58, an AA pilot since 1990 and EZ Tracker subscriber since 2002, was among the first to be barred. Ignoring a warning letter received in fall 2010, Seckman followed EZ Tracker’s advice in June 2011 to sell T. Rowe’s Science & Technology Fund. That September he was blocked from transferring money into T. Rowe funds for a year. “It was the most ridiculous thing that’s happened to me,” he says.

T. Rowe won’t say how many letters were sent, but DiBerardino and Burger believe that everyone who made that particular trade soon after the issue was published got barred. (A mutual fund has no way of knowing which of its investors are newsletter subscribers, of course, but it can see which participants in a 401(k) are making the same trades at the same time.)

The editors were defiant. “Who the hell are they to tell us how to run the portfolio?” says DiBerardino. So a month after the first ban ended, in August 2012, they advised buying T. Rowe’s New Horizons Fund, and three months later advised selling it. Seckman made those moves — and was promptly barred for another year.

Laurent, who was also banned twice, but on a different timetable, asks the question that plagued many of her fellow subscribers: “T. Rowe Price is huge. How can we disrupt the performance of their funds?”

How indeed? In response to MONEY’s inquiry, the company sent a statement: “Collective trading of fund holders acting on the recommendations of others, such as the advice of a newsletter, could cause large cash flows in and out of the T. Rowe Price funds …”

In other words, it’s not the frequency of trades that’s a problem, but that so many people are trading at once.

AA employees have nearly $11 billion in their 401(k)s, and pilots specifically have an average balance of $370,000, according to BrightScope, which ranks retirement plans. So if many of EZ Tracker’s AA subscribers buy one of the T. Rowe funds in the 401(k), the funds’ managers may have to invest in lesser-quality companies or park money in cash. Lots of sell orders, meanwhile, could force managers to unload assets before they reach peak value and drive down the market price of those assets. Buy or sell, managers also incur fees for executing trades. All those moves eat into a fund’s return and hurt investors who stay put.

A similar dynamic is responsible for Vanguard’s frustration with Southwest employees. The company’s pilots can generate up to $45 million in trades in a given fund the week after 401k Maximizer publishes, according to John Nordin of the Southwest pilot union’s 401(k) committee. “Equity funds are long-term investments,” says Michael Buek, a portfolio manager at Vanguard. “If everybody traded like that, our performance would be horrible.”

Regardless of whether a plan has specific rules governing “collective” trading — as T. Rowe now does — a fund company can block purchases at its discretion. By all accounts, though, bans such as those received by the airline employees are very unusual. Most 401(k) plans and funds do have rules to curb market timing. But enforcement actions on those are rare too: Only about 0.25% of Fidelity’s nearly 13 million 401(k) participants received warning letters for too-frequent trading in 2013.

What’s the real damage?

As it turns out, a ban sounds worse than it is: Those who’ve been barred are still allowed to sell holdings in T. Rowe funds, since by law mutual funds are not allowed to stop a sale. They can even buy into the funds through regular pay-check contributions, since those amounts are smaller and predictable. So the only thing barred employees can’t do is transfer an existing balance into the funds. But with 26 other funds to choose from, it’s not as if they’re out of options.

The real harm of frequent 401(k) trading isn’t the trouble you could get into from a fund company, but the fact that you’ll likely end up behind the market, says financial adviser and Pace University professor Lew Altfest. To beat benchmarks, you have to time two trades well — selling high and buying low. And that’s a hard bar to clear. Individuals tend to move at the wrong times. Even pros have terrible timing, evidenced by the fact that 61% of actively managed U.S. stock mutual funds underperformed indexes over the five years ending in 2013, according to Standard & Poor’s.

EZ Tracker — and most investing newsletters for that matter — chases returns, according to Hulbert. But there’s a reason the phrase “Past performance is not indicative of future results” has become a cliché. In looking at investor returns from 1995 to 2010, investment firm Gerstein Fisher found that while stocks that rose in the previous 12 months tended to continue rising in the short term, the shares got bid up so much that investors ended up underperforming by one percentage point a year. Further, an analysis of newsletters from 1986 to 2010 by Hulbert found that they underperformed the S&P 500 by an average 2.6 percentage points. “About 20% of the newsletters I track will beat the market, and 80% will not,” he says.

MONEY asked Altfest to review EZ Tracker’s published results. His finding? “Their record isn’t terrible, but it could be better.”

Related: Americans still worried about their long-term finances

The newsletter did well from its inception in 2002 to 2010, thanks largely to smart calls in 2008, and overall the 10-year annualized return for its aggressive portfolio topped the S&P 500’s by 3.3 percentage points. But from 2011 to the present, its cumulative three-year gain was 22%, vs. 50% for the S&P 500. “Thaaat’s the problem with a momentum strategy,” Altfest says. “You can have a favorable effect over short periods, but then there’s a change in the market, people start saying, ‘Get me out!’ and you can get bagged.”

Paul Burger acknowledges that market volatility hurt the newsletter’s returns of late but says, “If you look at the entire period of 12 years, we do outperform the indexes.” True, but as often happens when a money manager gets hot, investors piled in after EZ Tracker’s great 2008. Those subscribers don’t get the benefit of the outperformance.

Altfest also dug into Jim Irvine’s performance: In the five years since he began following the newsletter, his return was 9.1%, about half the 18% gain of the S&P 500. He didn’t follow EZ Tracker’s advice completely — a staunch political conservative who heads a gun-rights group, Irvine made some of his own trades based on his fears of a market downturn after President Obama’s reelection — so the newsletter had a better showing at 13.8%. But even a moderate asset-allocation fund in Irvine’s plan delivered 14.2% and an aggressive fund returned 17.5%. “Jim did entirely too much trading during the past year,” Altfest says. “401(k)s should be operated for long-term appreciation with only occasional judicious changes.”

Where they’ll go from here

Though EZ Tracker continued to recommend T. Rowe funds after the first round of one-year bans, DiBerardino and Burger stopped suggesting the company’s offerings after some subscribers were hit with permanent bans last summer. So now readers who follow the newsletter faithfully will miss out on high-performing funds like T. Rowe’s New Horizons ROWE PRICE N/HORIZ COM NPV PRNHX 1.0564% (33.7% return for the 12 months ending in March) and Science & Technology ROWE T PRICE SC&TE CAP STK NPV PRSCX 1.08% (37% for the same period). “We’re definitely at a disadvantage,” says DiBerardino, who has filed a complaint with the SEC. “But we’ve gained subscribers since this happened because of our long-term record.”

In spite of everything, Laurent (who reports a five-year annualized return of 15.1%) is unwavering in her loyalty to EZ Tracker. Seckman, too, is satisfied with how he’s done (15.3% over the same period). “I’m not trying to beat the market,” he says. “They’ve kept me out of trouble and given me reasonable returns.”

Initially Irvine was also committed to EZ Tracker and had shrugged off the ban — “I’ll just use other funds,” he said in his first interview with MONEY. But he had a different view after hearing Altfest’s feedback. The planner estimated that if Irvine continues to underperform, he’d need to work until 72 to hit his savings goal — an impossibility, since the airline has a mandatory retirement age of 65. Altfest suggested Irvine instead opt for a set-it-and-forget-it portfolio with 20% in cash and fixed income and 80% in equities, heavily weighted toward large-cap (38%) and international (25%) funds. With a reasonable 7% return, Irvine could retire at 64.

Related: 5 ways to reduce your financial anxiety

At first taken aback by the critique, Irvine soon saw Altfest had a point. In particular, the planner’s advice to buy three T. Rowe funds (now that his ban is over) made Irvine realize how much lingering anger was hurting him. “I was going to work longer just so I can not invest in their funds?” he says. “That’s cutting off my nose to spite my face.” His new investing plan in place, Irvine has been looking at boats — a 42-foot Jeanneau looks like a beauty — and made a spreadsheet to monitor his progress. “I lost track of the target,” he says. “It’s embarrassing because I’d never do that in an airplane. This has been a good wake-up call to right the ship.”

MONEY

How to Get in Trouble in Your 401(k)

American Airlines flight attendant Brigette Laurent felt confused about her 401(k) choices before she started following the advice of an investment newsletter. photo: pat molnar

Make a trade now and again? You should know that the mutual funds in your plan may disallow or penalize certain actions; your plan administrator, with your employer’s input, may have set other rules.

Check with HR to find out what applies to you, but beware these often-restricted moves:

Making a “roundtrip” transaction

The rule: Funds or administrators may limit your ability to sell out of a fund and then buy back in within a short period, called a roundtrip.

For example, the first time you sell a Fidelity fund and then reinvest more than $1,000 into the same fund within 30 days, you’ll get a warning; subsequent roundtrips result in restrictions on how often you can trade in the future.

(The Fidelity plan at Time Inc. — MONEY’s parent company — limits employees to one trade a quarter after the third roundtrip.)

Related: American Airlines employees locked out of 401(k) funds

The reason: Roundtrips require managers to buy and sell assets, and therefore hike up administrative costs for the fund, says Mike Alfred, co-founder of BrightScope, which ranks 401(k) plans.

Selling soon after you buy

The rule: With certain funds, if you sell before owning for a minimum period — usually 30 or 60 days — you’ll pay a fee of up to 2% of the price of the shares.

The reason: Redemption fees are often levied on funds with holdings that are not as easily bought or sold, such as small-cap stocks and international equities, says Susan Powers, senior VP of investment consulting at Fidelity. The lack of liquidity could result in such funds taking a big performance hit as a result of short-term trading.

Buying too much company stock

The rule: Public companies often put a cap on how much employer stock that workers can own, says Powers. The restriction is usually built into the plan, so that you wouldn’t be able to invest more than, say, 25% of your money with your company.

The reason: In a post-Enron world, says Powers, 401(k) plans are designed to prevent employees from holding 100% of their portfolio in their employer’s stock.

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