MONEY 401(k)s

The Big Mistake That Most 401(k) Savers Are Making

uneven balance with money on each side
iStock

The average 401(k) plan balance has risen to $100,000. But most workers fail to rebalance, so risks are rising too.

When it comes to saving in your 401(k), doing nothing can often work wonders.

As a recent survey by Aon Hewitt found, some 79% of workers who are eligible for a 401(k) or similar plan are participating, thanks in large part to the do-nothing magic of automatic enrollment. It’s the highest level since at least 2002, when the firm started tracking participation rates. This steady saving helped push account balances to a record high of $100,320 last year, up 10% from 2013.

Still, 401(k) inertia has a downside too. As the survey shows, most workers aren’t paying attention to the investments they hold, which increases the odds they will fall short of their retirement goals.

Take those record balances. Truth is, that 10% growth rate is relatively sluggish, which suggests many participants are invested in an ultra-conservative manner. The S&P 500 stock index jumped 13.5% in 2014, while Treasury bonds produced a 10.75% return. Moreover, only 24% of participants increased the amount they save each pay period, Aon Hewitt found. So even with additional cash going in, the average balance did not keep pace with either the stock market or the bond market.

Granted, a portion of that slow growth can be explained by regular distributions and early withdrawals. Last year, 3.6% of participants took regular withdrawals, up slightly from 3.5% the previous year, the Investment Company Institute reports. Meanwhile, 1.7% took a hardship withdrawal and at year-end 17.9% had a plan loan outstanding, ICI says. But a bigger issue probably has to do with participants leaving too much money in short-term money market accounts. In a lot of plans with automatic enrollment, the money goes into cash accounts that yield well under 1%.

Looking beyond account balances, Aon Hewitt’s data highlights another worrisome trend—only 15% of 401(k) savers did any sort of rebalancing last year, one of the lowest trading rates on record. Rebalancing is a fundamental aspect of long-term investing. Say your target asset mix is 60% stocks, 30% bonds and 10% cash. Once a year you should sell just enough of the funds that grow fastest (lately, stocks)— and add enough to the laggards (cash and bonds)—to restore your target mix. This time-tested strategy ensures you will buy low and sell high over the long haul and maintain the right level of risk in your portfolio.

Two years ago, stocks rose 32% and bonds fell 9%. The prudent move would have been to sell some stocks and buy some bonds, which would have let you benefit from the bond market’s rally last year. Stocks also rose last year by 13.7%. So if you haven’t rebalanced in the past two years, you probably hold a lot more in stocks than you originally intended, which means you may suffer worse-than-expected losses when the next bear market arrives.

The low level of rebalancing activity is only partly explained by the stunning rise of target-date funds, which automatically adjust holdings as you age. About 70% of 401(k) plans offer target-date funds and 75% of plan participants invest in them, according to T. Rowe Price. Stripping those and similar funds out, Aon still found that only 19% of participants rebalanced.

Add it all up, and it’s clear that workers now realize that they must save, and they want to know more about managing their money. But many are held back by inertia and concerns that they don’t know what they are doing. That’s why most heartily embrace plan features like automatic enrollment and automatic escalation of contributions. Aon Hewitt says workers would also benefit from better access to online tools and advice, and a simplified lineup of investment options.

The Holy Grail, though, may be a guaranteed lifetime income product, such as a deferred fixed annuity (for a portion of your portfolio), inside all defined contribution plans. These reduce the risk of failing to rebalance while giving workers something most sorely lack—an income stream other than Social Security that will never run out. Slowly, these income products are coming, Aon Hewitt says, as leading-edge companies better understand the laws and their responsibilities for what is a fairly new investment option.

Read next: How the New-Model 401(k) Can Boost Your Retirement Savings

MONEY stocks

The Fed Chair Says Stocks Look Expensive. Here’s What She Means

Janet Yellen, chair of the U.S. Federal Reserve, speaks at the Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C., U.S., on Wednesday, May 6, 2015.
Andrew Harrer—Bloomberg via Getty Images Janet Yellen, chair of the U.S. Federal Reserve, speaks at the Institute for New Economic Thinking conference at the IMF headquarters in Washington, D.C., U.S., on Wednesday, May 6, 2015.

According to one respected measure, prices are high and the long-run prospects for returns aren't so hot.

On Wednesday, Federal Reserve chair Janet Yellen sparked some selling in the stock market when she remarked at conference that stock prices look “quite high.”

Yellen didn’t specify exactly how she was measuring stock valuations, but it’s easy enough to guess at what she means. A standard way to judge whether the market looks cheap or frothy is to look at the share price of companies on the blue-chip S&P 500 index, relative to their earnings—the P/E ratio.

To smooth out the effect of booms and busts in corporate profits, many market analysts today like to look at a version of P/E called the cyclically adjusted P/E (or CAPE). It uses the current S&P level compared with the average of the past 10 years of earnings. It’s also sometimes called the Shiller P/E, after Nobel Prize-winning Yale economist Robert Shiller, who popularized this method.

Right now, the Shiller P/E is about 27, up from about 15 in the immediate wake of the financial crisis.

Shiller recently dropped by MONEY’s offices, and he agrees with Yellen: Stocks look kind of pricey now. But, he adds, that doesn’t mean they couldn’t get even more expensive.

And why, you might ask, does the Fed care what investors pay for stocks? More on that here.

TIME Apple

What Apple’s Gargantuan Cash Giveaway Really Means

Mmmmmoney: Get a grip; it's just paper
KAREN BLEIER; AFP/Getty Images Mmmmmoney: Get a grip; it's just paper

$200 billion dollars—and it only means 1 thing

Apple’s announcement today that it would increase its dividend 10.6% and give out the biggest chunk of cash to shareholders in history—$200 billion of capital will be returned to investors through March 2017—means one thing and one thing only. The market has topped.

As I’ve written numerous times in recent months, share buybacks and dividend payments of this type don’t signal underlying economic health so much as they indicate a market riding on a financialized sugar high, one built on easy money, cash hording and tax dodging, which will eventually crash. Carl Icahn himself admitted as much to me when I interviewed him back in 2013, for a TIME cover story that looked at his quest to get Apple to give back $150 billion worth of cash to investors. “This market will break,” he said back then, even as he and many others were pushing for America’s richest firms to give investors more of the $4 trillion on their balance sheets (about half of which is held offshore). The only question now is when.

Indeed, one of the reasons that Icahn and others have been able to demand such huge payouts, and that companies like Apple have been able to deliver them, is that the Fed has poured $4 trillion into the market over the last few years, and kept interest rates at historic lows. That’s a crucial part of understanding this massive Apple payout. Despite having nearly 10% of corporate America’s liquid assets on hand, Apple has borrowed much of the money needed to do its capital return program over the last few years, at the lowest rates in corporate history, in order to avoid taking money out of offshore tax havens and paying the U.S. corporate tax rate on it. (CEO Tim Cook has said he would support repatriating some of the money at a lower rate as part of a wider deal on offshore holdings.)

Not only does issuing debt in order to hand over cash to investors save Apple billions, it almost always boosts its share price–buybacks necessarily do that, since they artificially decrease the amount of shares on the market, without actually changing the real value of the company via true strategic investments, like research and development, worker training, or anything else that might bolster the underlying prospects of the firm. More broadly, buyback wizardry underscores one of the great ironies of American business today–the country’s biggest, richest companies have more contact with investors and capital markets than ever before, yet they don’t actually need any capital.

Apple, one of the most admired firms in the world, now spends a large chunk of time thinking about how to create value via financial engineering. This is by no means just about Apple, which is pouring a lot of its wealth into noble pursuits such as green energy even in places like China and some limited factories in America.

But there is a larger uncomfortable truth here that many economists have begun to suspect, on a wide scale, has a lot to do with our permanently slow growth economy. One key part of the theory of “secular stagnation,” which is being bandied about by experts such Larry Summers, is that financial markets are no longer serving the real economy because they funnel so much money away from it. Others go further, believing that financialization itself is a core reason for slow growth and the decreasing competitiveness of U.S. economy in a global landscape.

The biggest economic conundrum of our age–why many companies aren’t investing the cash they have sitting on their balance into our economy in things like factories, workers and wages—turns out to have an easy answer. It’s because they are using it to bolster markets and enrich the 1% via capital return programs instead. A recent paper from the Roosevelt Institute shows that as borrowing to fund paybacks to investors has increased over the last few years has increased, investment into the real economy has decreased.

It’s a trend that has reached a fever pitch in the last decade or so, and particularly the last few years. From 2003 to 2013, the 454 firms in the S&P 500 index did $3.2 trillion worth of buybacks, representing 51% of their income, and another $2.3 trillion on dividend payments, which represented an additional 35% of income. By 2014, buybacks and dividends represented 95% of corporate income, and if the trend continues, they’ll reach over 100% in 2015. The bulk of these buybacks, which sped up following the low interest rate, easy money environment following the 2008 financial crisis, were done during market peaks, belying the notion that such purchases represent firms’ own belief in a rising share price. Many of them were done with borrowed funds (corporate margin debt is at record highs). The buybacks didn’t help make companies more competitive, but they did enrich executives, who took between 66% and 82% of their compensation in stock over the last seven years.

What this means on a practical level is that the claim from corporate leaders about how tight credit conditions, a lack of consumer demand and an uncertain regulatory environment has kept them from investing their cash horde back into the real economy is not the case. William Lazonick, a University of Massachusetts professor who has done extensive research on the topic of buybacks, says that the move from a “retain and reinvest” corporate model to a “downsize and distribute” one is in large part responsible for a “national economy characterized by income inequity, employment instability, and diminished innovative capability.” I couldn’t agree more.

MONEY stocks

How to Beat the Summer Market Doldrums

Matt Harrison Clough

Contrary to market lore, summer is no time to sell stocks and sit on cash, but it is a chance to adjust.

There’s an old Wall Street saying: “Sell in May and go away,” because stocks tend to do poorly in the summer. That’s been attributed to traders going on vacation, or the notion that spring bonuses on the Street stoke a buying euphoria that wears off by June. It may just be that the old saying itself creates a self-fulfilling prophecy. Because, surprisingly, there’s something to it. Since 1926 stocks have returned only around half as much from May through October as they have in the rest of the year.

The summer doldrums are nearly here. Plus, the Federal Reserve is threatening to hike interest rates, and the bull market is feeling old. So you’re probably already hearing the drumbeat telling you to sell.

Yet there’s one thing proponents of sell-in-May leave out. For practical purposes, it still doesn’t beat buying and holding. “It makes sense only if you have an alternative investment,” says Steve LeCompte, editor of CXOadvisory.com. And you really don’t: Even during the May–October stretch, stocks on average outpace cash and bonds. Factor in trading costs, and sell-in-May looks even worse.

Since 1871, finds LeCompte, buy-and-hold produced an annual rate of return of 8.9%, vs. 4.8% for the seasonal strategy. That doesn’t mean you must totally ignore stocks’ summer blahs, though. There are two ways to take advantage of the pattern without betting big on timing the market.

Make that “rebalance in May”

You may already be rebalancing every year or two. The logic of rebalancing is that by resetting your assets back to their original mix, you often are selling a faster-growing investment that’s gotten expensive. You don’t need to do this often when you are young and mostly in stocks anyway, but later on rebalancing helps keep a conservative portfolio conservative.

Yet if you do this near the end of the year, as many do, you may be selling stocks when they still have some pep. Rebalance in May, and you’ll give up less return in the short run. From May through October, the annualized growth rate for stocks is just 0.7 percentage points more than for bonds.

Stay away from riskier plays

While there’s no reason to bail in May, it isn’t the best time to add new risks. Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the summer effect is particularly strong in economically sensitive areas like consumer discretionary stocks and small-caps. If you set aside part of your portfolio for more-speculative bets, consider coming back to it in autumn. You may find you have more bargain-priced choices. And your beach days will have been less stressful.

Read Next: How to Tame the (Inevitable) Bear Market

MONEY retirement planning

One Thing Successful Retirement Savers Have in Common

Gold Eggs
Getty Images

With the markets rebounding, workers with 401(k)s feel more confident about retirement. Everyone else, not so much.

Retirement confidence in the U.S. stands at its highest point since the Great Recession, new research shows. But the recent gains have been almost entirely confined to those with a traditional pension or tax-advantaged retirement account, such as a 401(k) or IRA.

Some 22% of workers are “very” confident they will be able to live comfortably in retirement, according to the Employee Benefit Research Institute 2015 Retirement Confidence Survey, an annual benchmark report. That’s up from 18% last year and 13% in 2013. But it remains shy of the 27% reading hit in 2007, just before the meltdown. Adding those who are “somewhat” confident, the share jumps to 58%—again, well below the 2007 reading (70%).

The heightened sense of security comes as the job market has inched back to life and home values are on the rise. Perhaps more importantly: stocks have been on a tear, rising by double digits five of the last six years and tripling from their recession lows.

Those with an employer-sponsored retirement plan are most likely to have avoided selling stocks while they were depressed and to have stuck to a savings regimen. With the market surge, it should come as no surprise that this group has regained the most confidence—71% of those with a plan are very or somewhat confident, vs. just 33% of those who are not, EBRI found. (That finding echoes earlier surveys highlighting retirement inequality.)

Among those who aren’t saving, daily living costs are the most commonly cited reason (50%). While worries over debt are down, it remains a key variable. Only 6% of those with a major debt problem are confident about retirement while 56% are not confident at all. But despite those savings barriers, most workers say they could save a bit more for retirement—69% say they could put away $25 a week more than they’re doing now.

At the root of growing retirement confidence is a perceived ability to afford potentially frightening old-age expenses, including long-term care (14% are very confident, vs. 9% in 2011) and other medical expenses (18%, vs. 12% in 2011). The market rebound probably explains most of that, though flexible and affordable new long-term care options and wider availability of health insurance through Obamacare may play a role.

At the same time, many workers have adjusted to the likelihood they will work longer, which means they can save longer and get more from Social Security by delaying benefits. Some 16% of workers say the date they intend to retire has changed in the past year, and 81% of those say the date is later than previously planned. In all, 64% of workers say they are behind schedule as it relates to saving for retirement, drawing a clear picture of our saving crisis no matter how many are feeling better about their prospects.

Those adjustments are simply realistic. Some 57% of workers say their total savings and investments are less than $25,000. Only one out of five workers with plans have more than $250,000 saved for retirement, and only 1% of those without plans. Clearly, additional working and saving is necessary to avoid running out of money.

Still, many workers have no idea how much they even need to be putting away. When asked what percentage of income they need to save, 27% said they didn’t know. And almost half of workers age 45 and older have not tried to figure out how much money they need to meet their retirement goals, though those numbers are edging up. As previous EBRI studies have found, workers who make these calculations tend to set higher goals, and they are more confident about reaching them.

To build your own savings plan, start by using an online retirement savings calculator, such as those offered by T. Rowe Price or Vanguard. And you can check out Money’s retirement advice here and here.

Read next: Why Roth IRA Tax Tricks Won’t Rescue Your Retirement

MONEY Investing

Why Wary Investors May Keep the Bull Market Running

running bull
Ernst Haas—Getty Images

Retirement investors are optimistic but have not forgotten the meltdown. That's good news.

Six years into a bull market, individual investors around the world are feeling confident. Four in five say stocks will do even better this year than they did last year, new research shows. In the U.S., that means a 13.5% return in 2015. The bar is set at 8% in places like Spain, Japan and Singapore.

Ordinarily, such bullishness following years of heady gains might signal the kind of speculative environment that often precedes a market bust. Stocks in the U.S. have risen by double digits five of six years since the meltdown in 2008. They are up 3%, on average, this year.

But most individuals in the market seem to be on the lookout for dangerous levels of froth. The share that say they are struggling between pursuing returns and protecting capital jumped to 73% in this year’s Natixis Global Asset Management survey. That compares to 67% in 2013. Meanwhile, the share of individuals that said they would choose safety over performance also jumped, to 84% this year from 78% in 2014.

This heightened caution makes sense deep into a bull market and may help prolong the run. Other surveys have shown that many investors are hunkered down in cash. That much money on the sidelines could well fuel future gains, assuming these savers plow more of that cash into stocks.

Still, there is a seat-of-the-pants quality to investors’ behavior, rather than firm conviction. In the survey, 57% said they have no financial goals, 67% have no financial plan, and 77% rely on gut instincts to make investing decisions. This lack of direction persists even though most cite retirement as their chief financial concern. Other top worries include the cost of long-term care, out-of-pocket medical expenses, and inflation.

These are all thorny issues. But investing for retirement does not have to be a difficult chore. Saving is the hardest part. If you have no plan, getting one can be a simple as choosing a likely retirement year and dumping your savings into a target-date mutual fund with that year in the name. A professional will manage your risk and diversification, and slowly move you into safer fixed-income products as you near retirement.

If you are modestly more hands-on, you can get diversification and low costs through a single global stock index fund like iShares MSCI All Country or Vanguard Total World, both of which are exchange-traded funds (ETFs). You can also choose a handful of stock and bond index funds if you prefer a bit more involvement. (You can find good choices on our Money 50 list of recommended funds and ETFs.) Such strategies will keep you focused on the long run, which for retirement savers never goes out of fashion.

Read next: Why a Strong Dollar Hurts Investors And What They Should Do About It

TIME Economy

Don’t Trust the Markets: A Correction Is Coming

stock-market-data-screen
Getty Images

The Fed, despite its recent pronouncements, will trigger a fall in stock prices later this year

Up until yesterday’s Fed meeting, America’s central bankers said they were going to be “patient” about the timing of an interest rate hike, which most experts believe will ultimately result in a significant stock market correction (see my recent column about why). So why did that make markets go up so dramatically yesterday?

Because everything else about the Fed’s communication said “we’re going to be more patient than ever” about when and how to raise rates. The central bank downgraded its forecast on the US economic recovery, saying that the pace of the recovery had “moderated somewhat,” in large part because of the strong dollar.

Why is the dollar strong? Mainly because everyone knows that the easy money monetary policy in the US is coming to an end. (QE is over, and most economists are now predicting a rate hike by September.) Meanwhile, pretty much every other central bank is now easing monetary policy—witness the ECB’s new money dump, which has sent European markets soaring.

What does all this tell us? That markets and the real economy are disconnected in a way that is terrifying. Central banks are, as chief economic advisor to Allianz and former PIMCO CEO Mohamed El-Erian put it to me recently, “the only game in town.” Every time the Fed says it will keep rates low a little longer, the market party goes on. All that means is that there will be more pain, eventually, when the punch bowl gets pulled away.

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