MONEY 401(k)s

The Secret To Building A Bigger 401(k)

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Brad Wilson—Getty Images

There's growing evidence that financial advice makes a big difference in your ability to achieve a comfortable retirement.

Some people need a personal trainer to get motivated to exercise regularly. There’s growing evidence that a financial coach can help whip your retirement savings into better shape too.

People in 401(k) plans who work with financial advisors save more and have clearer financial goals than people who don’t use professional advice, according to a study out today by Natixis Global Asset Management. Workers with advisors contribute 9.5% of their annual salary to their 401(k) vs. 7.8% by those who aren’t advised, according to Natixis. That puts workers with advisors on target for the 10% to 15% of your annual income you need to put away (including company match) if you want to retire comfortably.

Natixis also found that three-quarters of 401(k) plan participants with advisors say they know what their 401(k) balance should be by the time they retire vs. half of workers without advisors who say the same.

The Natixis study follows a Charles Schwab survey out last week that found that workers who used third-party professional advisors and had one-on-one counseling tended to increase their savings rate, were better diversified and stayed the course in their investing decisions despite market ups and downs.

Similar research was released in May by Financial Engines—that study found that people who got professional investment help through managed accounts, target-date funds or online tools earned higher median annual returns than those who go it alone. On average employees getting advice had median annual returns that were 3.32 percentage points higher, net of fees, than workers managing their own retirement accounts.

Granted, most of these studies come from organizations that make money by providing advice—either directly to investors or as a resource provided by 401(k) plan providers. Still, Vanguard, who provides services to both advisers and do-it-yourself investors, has published research showing that financial guidance can add value. In a 2013 research paper, Advisor’s Alpha, Vanguard said that “left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.” According to Vanguard, advisers can help add value if they “act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it.”

In other words, the value of working with an advisor, like a personal trainer, may simply be that when someone is working one-on-one with you to reach a goal you are more likely to be engaged.

Whether you want to work with a financial advisor is a personal decision. If you’re like many people who feel overwhelmed by investment choices, or don’t have a lot of time to spend on investment decisions, getting professional financial advice can help you stay on course towards your retirement goals. You can get that advice through your 401(k) plan or via a periodic check up with a fee-only financial planner or simply by putting your retirement funds into a target date fund.

Still, before you hire a pro, make sure you understand the fees. A recent study by the GAO found that 401(k) managed accounts, which let you turn over portfolio decisions to a pro, may be costly—management fees ranged from .08% to as high as 1%, on top of investing expenses. Ideally, you should pay 0.3% or less. High fees could wipe out the advantage of professional guidance.

Other research has found that you may get similar benefits—generally at a much lower cost—by opting for a target-date fund. If you go outside your 401(k) plan, it’s generally better to use a fee-only planner, who gets paid only for the advice provided, not commissions earned by selling financial products. You can find fee-only financial planners through the National Association of Personal Financial Advisors; and for fee-only planners who charge by the hour, you can try Garrett Planning Network.

Still, if you enjoy investing, and you are willing to spend the time needed to stay on top of your finances, a do-it-yourself approach is fine. Using online calculators can give you a clearer picture of your goals, and simply knowing what your target should be can be motivating. The Employee Benefit Research Institute (EBRI) consistently finds that people who calculated a savings goal were more than twice as likely to feel very confident they’ll be able to accumulate the money they need to retire and are more realistic about how much they need to save. All of which will help you reach your retirement goals.

MONEY Investing

Do You Really Need Stocks When Investing For Retirement?

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Joe McBride—Getty Images

You may want to skip the thrills and chills of equities. But if you stick with bonds, be ready to do serious saving to reach your goals.

Even when stocks are doing well—and they’ve been on an incredible run the past five years with 17% annualized gains—there’s always a looming threat that the bottom could fall out of the market as it did when stock values plummeted more than 50% from the market’s high in 2007 to its trough in 2009. So it’s understandable, especially now when doubts abound about the longevity of this bull market, that you might ask yourself: Should I just skip stocks altogether when investing for retirement?

But if you’re inclined to give stocks a pass—or even just considering that option—you should be aware of the drawbacks of that choice. And, yes, there are substantial drawbacks.

Despite their gut-wrenching volatility—or, more accurately, because of it—stocks tend to generate higher returns than other financial assets like bonds, CDs and Treasury bills by a wide margin over the long term. That superior performance isn’t guaranteed, but it’s been pretty persistent over the last 100 years or longer.

Those higher long-term gains give you a practical advantage when it comes to saving for retirement. For a given amount of savings, you are likely to end up with a much larger nest egg by investing in stocks than had you shunned them. Another way to look at it is that by investing in stocks you can build a large nest egg without having to devote as much of your current income to savings.

Just how much of an advantage can stocks bestow? Here’s an example based on some scenarios I ran using T. Rowe Price’s Retirement Income Calculator, which you can find in Real Deal Retirement’s Retirement Toolbox.

Let’s assume you’re 30, earn $40,000 a year and are just beginning to save for retirement. The calculator assumes you’ll want to retire on 75% of your salary, so the target retirement income you’re shooting for is $30,000 (This is in today’s dollars; the calculator takes into account that your income will be much higher 35 years from now.)

First, let’s see how much you would have to save if you invest in, say, a mix of 70% stocks and 30% bonds, certainly nothing too racy for a 30-year-old with 35 years until retirement. To have at least a 70% chance of retiring on 75% of your pre-retirement salary at age 65 from a combination of Social Security payments and draws from your nest egg, you would have to set aside roughly 15% of your salary each year. (Or, if you have an employer generous enough to match, say, 6% of your salary, you’d have to kick in only 9% to reach 15%.)

You could improve that 70% probability by saving more or homing in on low-cost investment options, but let’s stick with the scenario above as a baseline for comparison.

So how would you fare if you decide to skip stocks altogether and invest solely in bonds? Well, if you stick with a 15% savings rate, your chances of being able to generate 75% of your pre-retirement income would drop to less than 20%. Not very comforting. You can boost the odds in your favor by saving more. But to get your chances of generating 75% of pre-retirement income back up to the 70% level, you would have to save almost 25% of your income each year. That’s a standard most people would have trouble meeting.

And the percentage of salary you would have to save would be even higher if you decide to hunker down in cash equivalents like money funds and CDs: just under 30%, or almost a third of your income.

Even if you had the iron will and perseverance to meet such lofty savings targets, diverting so much income from current spending to saving could seriously diminish the standard of living you and your family could enjoy during your career.

Just to be clear, I’m not suggesting anyone should just load up on stocks willy-nilly. That would be foolish, especially as you near or enter retirement, when a stock-market meltdown could derail your retirement plans. Indeed, in another column, I specifically warn against relying too much on outsize returns (whether from stocks or any other investment) to build a nest egg. Smart investing can’t replace diligent saving.

The point, though, is that stocks should be part of your investing strategy prior to and even during retirement. The percentage of your savings that you devote to equities can vary depending on such factors as your age, how upset get when the market goes into a steep funk and how much you’re willing to entertain the possibility of not having enough money to retire comfortably or running short of dough during retirement. Some of the links in my Retirement Toolbox section can help you settle on a stocks-bonds mix that makes sense for you.

But if after considering the pros and cons, you decide stocks just aren’t for you, fine. You’d just better be prepared to save your you-know-what off during your career, and keep especially close tabs on withdrawals from your nest egg after you retire.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

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MONEY financial literacy

Why Workers and Retirees Missed the Roaring Bull Market

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Jupiterimages—Getty Images

Investor optimism dips, especially among retirees, a new survey finds. Maybe it's because 1 in 10 investors haven't noticed the huge gains in the market.

Quick, how much did the stock market gain last year? Tough question, right? Okay, let’s try a multiple choice: Based on the S&P 500 index, did the market rise 10%, 20%, or 30%? Evidently, that’s a tough question too because the vast majority of investors haven’t a clue.

Only 11% of adults with at least $10,000 in savings and investments got it right in a Wells Fargo/Gallup poll. This stands in stark contrast to the 67% that rate themselves somewhat or highly knowledgeable about investing and underscores the extent to which so many people simply don’t know what they don’t know.

For the record, the S&P 500 rose 30% in 2013—you received a total return of 32% if you reinvested dividends. This is the 13th biggest gain in a calendar year since 1926. Forget about getting the percentage right. Anyone paying attention should at least know that last year was a huge winner. Yet only 64% of investors even knew the market was up. Of those who did, 57% thought the gain was just 10% while 27% thought the gain was 20%. About 1% was looking through rose-colored glasses and thought the market rose 40% or more.

The poll also found that retirees were feeling much less optimistic in the second quarter. The Wells Fargo/Gallup Investor and Retirement Optimism index declined modestly overall but the portion looking only at retirees plunged 41%. This too seems incongruous. Second-quarter GDP surged 4%, one of the sharpest quarterly gains since the Great Recession.

One reason for this gloom is that about half of both retirees and workers are worried they will outlive their money, the poll found. Sadly, this may be a self-fulfilling prophecy. Playing it safe and earning 1% in a money market account won’t amount to much over time. Meanwhile, those who stayed true to a diversified portfolio of stocks through the downturn are doing better than ever. They were present for that 32% market gain—even if they have no idea how great last year was for them.

As a whole, the findings suggest that many people remain fixated on the past. The recession was a harrowing and humbling experience. But it is over. Real estate prices have turned up and the job picture is better. The stock market has more than doubled from the bottom. Yet when asked what they would do with a $10,000 gift, 56% in the poll said they would hold it as cash or stash it in an ultra-safe bank CD—not invest for growth. At this rate, expect more declines in optimism, especially as retirees stuck in cash see further declines in income.

Related stories:

 

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 -1.2857% (33.7% return for the 12 months ending in March) and Science & Technology ROWE T PRICE SC&TE CAP STK NPV PRSCX -1.3327% (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 retirement investing

The Missing Bond Funds in 401(k)s

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Calculator and graph Jupiterimages—Getty Images

Bonds are no longer a plain-vanilla investment. Here's what to do if your plan has just one flavor.

This market is causing some cognitive dissonance, especially for investors worried about risk. Conventional wisdom says the way to reduce volatility in your portfolio is to hold bonds.

At the same time, experts are warning that bonds are a chancy play right now. Super-low interest rates will eventually head back up, which could trigger losses in your fixed-income funds.

There is a solution — but also a catch. Many 401(k) investors don’t have all the tools within their plan to implement a perfect portfolio.

The fix, in theory: First, own shorter-maturity bonds, which don’t fall as far when rates rise. Then diversify.

T. Rowe Price financial planner Judith Ward suggests rounding out your portfolio with high-yield bonds, where credit is a bigger risk than rates, and international bonds. “Foreign issues react less to U.S. rate hikes,” says Ward. You can also hedge against rising consumer prices by adding an inflation-protected TIPS fund.

In many 401(k)s, though, the diversification steps aren’t possible. For example, only 11% of large plans offer foreign bonds, according to BrightScope, which gathers 401(k) data.

“Bonds have traditionally been an afterthought for employers and investors,” says Rick Meigs, president of 401khelpcenter.com. That’s not likely to change, since employers are shifting to target-date funds, which mix stocks and bonds in a single portfolio.

Still, there are ways to protect your retirement savings. Consider these three alternatives:

Use your IRA to bolster your bonds. The funds you lack in your plan can be purchased in an IRA.

Look at your 401(k)s and IRAs as one pie; you don’t have to slice each account identically to get the mix you want. Own fewer stocks in your IRA, and more in your 401(k), to free up IRA money to buy a more diverse set of bond funds.

Ward suggests a mix of 70% in high-quality intermediate term (TIPS can be part of that), 10% in high yield, 10% in foreign, and 10% in emerging markets.

Exploit the one edge in 401(k)s. If you are close to retirement, you may want an investment that’s shorter and safer than a typical core bond fund. About 75% of large plans offer a stable-value fund, which fits the bill.

Split your fixed-income allocation between intermediate-term funds and stable value, suggests Chicago financial planner Roger Wohlner. Backed by insurance contracts and offered only in retirement plans, stable-value funds combine low risk with yields of about 1.6%.

Look beyond the next rate hike. A patient long-term investor can ride out paper losses on bond funds.

“Your retirement is likely to last for decades, which will take you through several interest rate cycles,” says Colorado Springs financial adviser Allan Roth.

Over time, interest payments will be reinvested in issues with higher yield, which will eventually give you a higher return than hunkering down in cash.

MONEY makeovers

Couple Needs to Take More Risk With $455,000 Savings

Paul and Linda Schilling, ages 60 and 59, Coral Springs, Fla. Photo: Miller Mobley

For Paul and Linda Schilling, retirement will be a welcome return to a regular life.

In 16 years of managing a successful UPS store six days a week, the couple have rarely been able to take more than a day off work at a time or see their favorite Florida Gators college football team play, never mind plan a real vacation.

“We want to travel while we’re still healthy,” says Linda. They would like to retire in six years — or sooner — and hope to begin taking two big trips a year.

With retirement in sight, though, the ups and downs of the stock market are making them nervous. “After clawing our way back from the crash, we’ve become much more conservative,” says Paul. And how.

Their once stock-heavy portfolio — which had lost 65% of its value at one point during the 2007-09 downturn — is now almost all in cash. The couple aren’t sure how to give themselves some potential for growth without taking on too much risk.

Otherwise, the Schillings have been pounding away at their goal.

After their son, Stephen, now 29, graduated from college, the Schillings began socking away as much as 15% of their annual income. Their small mortgage and car loan will be paid off within four years. And they expect to sell their business for at least $200,000.

Occupations: Together own and operate a UPS store franchise

Goals: To make savings last in retirement and afford frequent travel

Total income: $134,000

Total assets: $905,000

Retirement savings: $455,000; Home equity: $230,000; Cash: $20,000; Value of business: $200,000

THE PROBLEM

One word: inflation. With their savings in cash, “Paul and Linda will have a negative return as inflation eats away at their principal,” says Ben Tobias, a financial planner in Plantation, Fla.

THE ADVICE

Add stocks. Despite an impressive savings rate, the Schillings will have difficulty funding a long retirement with their current investments.

Tobias suggests a conservative 28% stock/72% bond mix mostly made up of intermediate-and short-term bonds and large-cap U.S. stocks.

Though nervous, Paul and Linda say they’re open to diversifying. “Ben makes a good argument,” Paul says.

Related: 5 retirement planning tips

Adding the cash from the sale of the business and their expected $50,000 Social Security benefit, Tobias projects the Schillings can afford to retire in six years, withdrawing 4.6% from their portfolio initially and less later on when they scale back on travel expenditures.

Buy long-term-care insurance. Tobias says he doesn’t advise most of his clients to get this pricey coverage, but the Schillings are an exception.

“They have enough assets to protect but not enough to self-insure,” he says, noting that an extended long stay in a long-term-care facility for one of them could wipe out all their savings for the other.

Related: Best Places to Retire

Paul balks at a policy that could cost more than $6,200 a year, but long-term-care specialist William Dyess says they can save $1,000 a year by scaling down the policy, choosing, for example, to extend the waiting period for benefits from 30 to 60 days.

Hang on to the home. Paul and Linda don’t want to move out of their four-bedroom home, valued at about $270,000.

That’s fine for now, says Tobias. If the couple get to their seventies and find that their financial picture isn’t as bright as they thought it would be, they could downsize to beef up their savings. Says Tobias: “The home is their ace in the hole.”

Would you like a free financial makeover in Money magazine? E-mail makeover@moneymail.com for more information.

MONEY

Retirement Investing in Uncertain Times

I’m 37, make $52,000 a year and have just begun putting money into a 401(k). With thirty years until retirement, I’m inclined to believe that a somewhat aggressive investing strategy will pay off in the long run. But given the immediate uncertainty in the economy and the market, am I better off investing in less risky funds in the short term? — Erik, Brooklyn, N.Y.

If you’re waiting for uncertainty, immediate or otherwise, to die down before you embark on your long-term investing strategy, you’re going to have a long wait. Things are never certain in the economy and the market.

Whether it’s concerns about the ability of a new Congress and a second Obama administration to get a handle on our massive budget deficit, worries about the effect Superstorm Sandy might have on future job growth, trepidation over the approaching fiscal cliff or anxiety stemming from the European debt crisis, uncertainty is a constant.

Or, to borrow a phrase from Gilda Radner’s classic Roseanne Roseannadanna character from the early days of Saturday Night Live: “It’s always something — if it ain’t one thing, it’s another.”

So the more important question you should be asking yourself is this: What kind of investor do you want to be, given that you’ll always have to deal with uncertainty? As I see it, you have two choices: you can be a reactive investor or a systematic investor.

Reactive investors spend most of their time figuring how to rejigger their investments to take advantage of new developments on the investing scene or to prevent those developments from hurting them.

Related: Worried about the Fiscal Cliff: Should I Sell?

If they see that inflation is ticking up or interest rates are starting to climb, they may shift money out of bonds and into gold or commodities. If they believe economic growth is weakening and the economy may be slipping into recession, they might get into defensive stocks or buy long-term bonds.

If you like making lots of moves with your investments, this is the right camp for you — for the reactive investor, investing is a never-ending guessing game. There will always be something going on in the economy or the markets that will catch your attention and require action.

The downside is that it’s tough — I would say virtually impossible — to make the right call consistently. Very often what seems like the obvious isn’t. Back in early 2009, for example, the last place most investors wanted to be was in stocks, which had just plummeted nearly 60% from their 2007 high. Moving to bonds or cash seemed a more prudent bet. Of course, we now know that since that low, stock prices have climbed more than 100%, while bonds gained about 28% and cash returned less than 1%.

A systematic investor, by contrast, starts with the premise that you can’t outguess the markets. The best you can do is set a strategy that will allow you to participate in the long-term upswing of stock prices, while hedging against the inevitable downturns by also holding some bonds and cash.

This type of investor doesn’t feel compelled to act every time a new piece of economic data flickers across his computer screen or a headline warns of impending doom.

Related: Retirement Savings: Quick Guide to How Much You’ll Need

Rather, the systematic investor realizes that one decision is key: determining the mix of stocks, bonds and cash that will give him a shot at reasonable returns while holding the risk of short-term setbacks to an acceptable level. Once he sets that mix, the systematic investor pretty much leaves it alone, except to rebalance periodically to bring the mix back to its original proportions.

If you prefer to be a reactive investor, I can’t offer you much advice. I don’t believe investors can consistently make the right moves in order to take advantage of market fluctuations. I think they’re more likely to end up hurting themselves.

No worries, though. There are plenty of brokers and other advisers out there all too willing to cater to the reactive investor’s need to act. In fact, the standard pitch from most of Wall Street and much of the financial services industry is that they know what moves to make, and for a price they’re willing to help you make the unending series of decisions you’ll face as a reactive investor.

If you want to join the systematic camp, however, then I suggest you stop obsessing about uncertainty and instead focus on creating a portfolio that makes sense for the long haul, in your case for someone with thirty or so years until retirement.

Related: Why There’s No Such Thing as Risk-Free Investing

Typically, retirement investors with that sort of time horizon invest between 70% and 90% of their savings in stocks with the rest in bonds, although the blend you choose should reflect how much you’re willing to see your account balance dip during market downturns. (To get a feel for the tradeoff between risk and return for different stocks-bonds mixes, you can check out Morningstar’s Asset Allocator tool.)

Of course, just because you arrive at the right mix doesn’t mean uncertainty will go away. It will always be there. But if you take the systematic approach, then at least you won’t have to react to it day after day after day.

MONEY Ask the Expert

5 Tips to Boost Your Retirement Savings

Q. I’m in my mid-30s and max out my 401(k) and a Roth IRA every year. I also invest $4,500 a year in mutual funds. What more should I be doing to prepare for retirement? Should I invest in individual companies in addition to funds? — Brian B., Jacksonville, Fla.

A. Sounds like you’re already taking the most important steps to get on the path to a secure retirement. You’re saving on a regular basis, maximizing tax-advantaged options — you’re even going above and beyond by investing a substantial sum in a taxable account each year.

Assuming all that saving amounts to a reasonable percentage of your annual income — say, 15% or so — I don’t think you need to make any radical changes.

That said, you may be able to enhance your retirement prospects by improving your retirement-planning strategy a bit. The key, though, is concentrating your efforts in areas that are likely to have the highest payoff.

Here’s what I recommend:

1. When it comes to investing, keep it simple. Unless you believe you have unique insights into the financial prospects for specific companies, I’d pass on investing in individual stocks. Without an edge, you’re not likely to outperform the market averages, and you could end up dragging down your returns.

Similarly, ignore the endless variety of niche funds and ETFs that investment firms constantly churn out. Here, I’m talking about funds and ETFs that home in on particular sectors of the market — oil, gas, platinum, gold, currencies, individual foreign countries, etc. — or that employ risky or arcane investing techniques, a la inverse funds and leveraged ETFs. It’s tough to integrate such investments into your portfolio in a coherent way, and they’re ultimately not worth the extra expense and effort.

Instead, focus on building a straightforward portfolio of broadly diversified stock and bond funds that will give you exposure to all areas of the market. For guidance on how to divvy up your money — between stocks and bonds overall and among particular types of stocks and bonds — just plug the ticker symbol for the Vanguard target-date retirement fund designed for someone your age — in your case, the 2040 VANGUARD CHESTER TGT RET2040 FD VFORX -1.0789% or 2045 fund VANGUARD CHESTER TARGET RETIREMENT 2045 FD VTIVX -1.1284% — into Morningstar’s Portfolio X-Ray tool. You don’t have to mimic its allocations precisely, but you probably don’t want to stray too far from them either.

2. Aim for lower costs. Your best shot at boosting your returns without taking on additional risk is to invest as much as possible in low-expense funds. Generally, that means looking for stock funds that have expense ratios below 1% and bond funds with expense ratios less than 0.75%. You can do even better, though, by sticking to low-cost index funds and ETFs like those on the MONEY 50 list of recommended funds.

Of course, in your 401(k) you’re limited to the menu of investments offered by your plan. But by perusing the fee disclosure the Department of Labor now requires plan sponsors to provide, you should be able to sift through your 401(k)’s investment roster and choose reasonably priced options.

3. Beware investment pitches based on tax benefits. After investing all you can in tax-advantaged 401(k)s and IRAs, you can plow any extra savings into taxable accounts, as you’re already doing to the tune of $4,500 a year.

Just be careful. Many advisers are quick to recommend variable annuities or life insurance investments for taxable accounts because of their potential tax savings. Problem is, these options typically come with high fees, not to mention a mind-numbing level of complexity.

Related: The Case for Investing in Bonds, Too

A better solution is to stash any saving you do outside 401(k)s and IRAs in tax-efficient investments like index funds, ETFs and tax-managed funds. You’ll likely pay far lower expenses, which will give you a better shot at a higher after-tax rate of return.

4. Save more as your income rises. There’s a natural tendency for people to ratchet up their lifestyle at a faster rate than their paycheck as it grows. But that can lead to problems come retirement time. The reason: As your income climbs, the percentage of your pre-retirement salary that Social Security will replace starts to shrink.

So the more you earn during your career, the more you’ll have to depend on your personal savings to maintain your standard of living in retirement. To avoid having to scale back your lifestyle during retirement, try to increase the percentage of your income you save as your earnings increase.

5. Monitor your progress. Over the course of a career, any number of setbacks — layoffs, market downturns, etc. — can derail even the best laid retirement plans. That’s why it’s crucial to evaluate how things are going and make adjustments if necessary.

You can do that several ways. One is to periodically assess the balance of your retirement accounts relative to your annual income. The important thing, though, is that one way or another you come away with a realistic sense of whether your current saving and investing plan is working and, if not, make the necessary tweaks to put you back on track.

You already appear to be off to an excellent start in your retirement planning. And if you follow these five tips, your chances of making a smooth transition from the work-a-day world to your post-career life should be just as upbeat.

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