I thought you all might be interested to hear Adam Bold’s, Founder and CIO of Smart401k and The Mutual Fund Store, outlook on the market. He provided it on the most recent airing of “The Mutual Fund Show” his weekly call-in radio show.
Here’s a link to the excerpt. There’s about a minute to a minute and half of diclosures/introductions before his commentary, but after that he dives right in.
Scott H
As many of you probably do, I read the Wall Street Journal as often as possible. Last week, I read an article detailing how West Virginia had recently switched back to a pension plan from a 401(k). I initially focused on the article because “401(k)” was in the title, but became more interested as I read about the issues that brought about the change of heart. Upon finishing the article I was both concerned for those adversely affected and reinforced in my belief of the importance of impartial, unbiased advice for participants.
Let’s start with a quick recap. The state of West Virginia switched to a 401(k) because like many employers they were facing continually increasing costs from their defined benefit (”db”) plan. When they decided to switch to a 401(k) they instituted a generous employer contribution of 7.5% vs. the most common private sector match of 50% on the dollar up to 6% of an individual’s salary. The plan offered stock and bond mutual funds, a money market fund, and an annuity. Seems like a pretty good set-up… right? Well, besides the fixed annuity part, but that’s a personal opinion.
So what went wrong and forced the state to switch back to a defined benefit plan?
First, the state actually lowered the amount employees were required to contribute to the plan (6% in the db plan and only 4.5% in the dc, or defined contribution, plan). A large employer match is great and certainly helps individuals prepare for retirement, but lowering the required contribution each individual had to make seems a bit odd to me.
Second, the plan had a fixed annuity option. I imagine there are situations where a fixed annuity makes sense for an individual. However, I struggle to think of a reason why almost 2/3 of plan assets should be invested in one, which according to the article was reached at one point during the plans existence. (If you want to learn more about annuities, check out our Primer on Annuities)
Now while I don’t understand why you would invest in a fixed annuity in a dc plan, I do understand how it happened. The story mentions that Valic (the company that offered the fixed annuity) sent in salespeople to talk about the annuity. In fact many of these salespeople were former educators and school employees. While I’m all for knowledgeable advisors working with participants to build appropriate investment plans, I have a problem with individuals who are “not authorized or directed to give investment advice” but who are “… only authorized to sell a fixed-annuity contract.” Inherently, this relationship is going to be rife with potential conflicts. First, a salesperson is incented to sell a product. Second, if you are a knowledge resource shouldn’t you be able to talk about other investments or the pension plan as a whole… especially in something as important as retirement investing?
So what does this mean?
I urge everyone who reads this post, no matter if you are a participant or employer, to do the research necessary to select appropriate investments. Or if you aren’t interested (or don’t think you have the knowledge) please consider using an advice provider. I’d love for it to be Smart401k, but would find it gratifying simply to know that you are taking control of your investments.
If you are an individual and want more information on Smart401k click here or contact one of our advisors who are authorized to provide advice. If you’re an employer and want to know more about how we can strengthen your plan and educate your employees click here to request more information.
If you have any questions or comments, feel free to post of comment to this article or call us at 1-877-627-8401.
Till next time…
Scott H
Full Disclosure: My knowledge about the situation is entirely contained with the WSJ article “When 401(k) Investing Goes Bad” that was published on Monday, August 4, 2008.
I’m now about three months out from the marathon which means that I’m in the heart of my training schedule.
So far, my longest run has been 14.1 miles. I’m currently dealing with the humidity of a Midwest summer (I moved from the San Francisco area about a year ago which has a far milder climate) and as a result have made a number of adjustments to my training regimen. I’ve been told that the best way to train is to get up in the morning before the humidity and heat hit their peak. Unfortunately, I have a bit of an issue with waking up in the morning. Despite the best of intentions, I always seem to start my run as the heat and humidity are peaking. After this Sunday, I think I may have finally have the motivation to change my ways. I ended up running outside for a little less than an hour and then finishing inside on the treadmill. I realized that it was probably counterproductive for me to run outside if I was going to subject myself to the worst part of the day. While I usually run indoors once a week (a quick thank you to whoever mounted a TV on workout equipment), I really don’t see myself having the patience to run for more than an hour on a treadmill.
The other changes that I’ve made so far are to buy another pair of shoes (unfortunately, I bought the wrong size the first time and only found out on my long runs), increased my caloric intake and have added a fourth day to my running schedule. I switched back to my now trusted Mizuno’s after realizing that my other pair was a bit small when my feet swelled on the longer runs. Other than the cost of buying another pair of shoes this was the easiest thing to fix so far. I have learned that a proper pair of shoes is equivalent to having an investment allocation that fits your personal situation (i.e. one of the most important pieces of any training or investment plan). I wish I wouldn’t have had to deal with the blisters to realize the mistake, but you live and learn (plus, now I know all about New-Skin).
After bonking on a couple long runs, I realized that I needed to increase my calorie intake to more properly fuel my body. In addition, I added a fourth day of running to increase the mileage that I am putting in each week in an effort to strengthen my legs and get used to the pounding your body takes from distance running.
So how does all of this relate to investing?
First, as I mentioned in my first blog article, without a plan and the tools to pursue that plan you the likelihood that you won’t reach your retirement goals on time.
Second, although I don’t advocate making significant changes to your retirement investment plan on a regular basis, I do believe in monitoring your plan in relation to your goal and making small adjustments when you discover they are necessary. Changes could be as simple as reviewing your account on a quarterly basis and updating your contribution elections to match our recommendations or they could be bigger like increasing your savings rate if you decide that you want to travel more than you initially thought.
And last but not least…. Educate yourself! I feel like I could have avoided most of these mistakes if I invested more time upfront to learn about the common pitfalls of marathon training. I’ve been working out for a long time, researched a number of different training schedules and examined several training related diets, but I could have easily taken it a bit further. This is all to say that there is always more to learn no matter how knowledgeable you are on a subject. You’ve taken the first step by reading this blog. The next step could be checking out our Insight articles. After that, you might want to check out some of the sites that we have recommended here. And as always, our advisors are here to answer any questions you might have regarding our advice or investing in general.
Thanks again for tuning in… I’ll make sure that the next post doesn’t take so long.
Scott H
P.S. Ed, thanks for the tips. I’m working on 3, 4, 5 and can’t wait for 6,7
So, its been a couple weeks since I told you that I was going to run the NYC Marathon. I mentioned that I had a plan and a goal and thought that I was good to go. The first week after my post went well. I had two good runs during that week and also ran the longest I have ever run (11 miles) at the pace that I set for the marathon (8 min 30 sec / miles). The next week started out well with two solid runs and then I got to my long run of the week… and the wheels came off. I was trying for 13.1 miles (1/2 marathon) and only made it to 10 miles before my body (and mind) had, had enough. To make matters worse I ran a slower pace than I had the previous week (9 min miles).
During my cool down walk back to my apartment I tried to analyze what went wrong and how I could “fix things” so that I could prevent this from happening again. By the time I got back, I had noted a couple things about the run (Time of day, food, hydration, etc.) that could be improvedand realized that it was probably just a bad run. However, I was still wondering if there were additional changes I could make. Luckily for me, I talked to my friend Matt shortly after I got back and he convinced me not to make any major changes to my plan. He pointed out that my times and distances had been improving pretty quickly and that I was bound to have a down day. We talked through my current training schedule and discussed running a bit earlier in the day, but other than that we decided that I shouldn’t make any major changes. He also pointed out that I had a long way to go until the marathon and that my current plan was a solid one.
After talking through my plan and my anxieties about it, I realized that what I was going through was very similar to feelings that many of our client’s must have as the market continues its volatile ways. During difficult times its natural to want to make changes to your plan, but these times are often the worst time to make substantial changes. It’s always good to give your plan a check-up and consider making small changes (i.e. run in the morning before the afternoon heat), but if it was a solid plan in the beginning it probably shouldn’t be changed all that much.
While I can understand your anxiety, I strongly caution you from making substantial changes to you investment strategy (assuming your initial investment strategy was a sound one) unless you have recently gone through a major life change. If you have had a life event, I would urge you to talk to your advisor. Together, you can evaluate the changes that have occurred since putting your plan in place.
Before i wrap up, I thought I’d end with a few things I’d like you to consider.
If you have any questions/comments our advisors are available by phone, email or live chat. If you want to us to review your 401(k) investment strategy feel free to become a client today. It only takes a few minutes.
In the meantime, I’m taking a long-term view to my training and hopefully you’ll take a long-term view towards your investments.
Scott H
Before I forget… Thanks to Rich for his comments/suggestions to my first post. Rich, I went out and bought a new pair of shoes.
I’m happy to report that I recently found out that I got into the New York City marathon. You can either qualify for it — which I’m not fast enough to do — or you enter a lottery, which is what I did. I’ve been running a lot lately, but now that I’m officially entered, I have to figure out how to run 26.2 miles.
So now I need to develop a training plan that will get my body and mind ready to run a distance that is far longer than I have ever attempted to run. Luckily, I know the distance that I have to run and I have figured out the time that I want to beat. Now, if you’re wondering why I’m writing about my marathon training here, here’s why: while I was figuring out my goal for the marathon, I realized that it was a very similar process to what I went through to figure out my retirement savings goal.
I have always been a goal oriented person, and as a result I’ve taken the time to set a savings goal that I believe will allow me to lead the type of lifestyle that I desire in retirement. Unfortunately, I have found that the majority of people that I talk to haven’t taken the time to do this for themselves.
When creating a plan, the first step is to think about what kind of life you want to live in retirement. Are you planning to travel? Maybe move to an area that has a higher cost of living? Or perhaps you expect to sell your house and move to something smaller? These are just a few of the scenarios that will impact how much you need to save.
The general rule of thumb is that you need to be able to replace 70-80% of your pre-retirement annual income to maintain a similar quality of life in retirement. If you’re not planning any big changes that’s probably a good goal. However, if you’re planning to travel or move to a warmer climate — that’s more expensive — you’ll probably need to be able to replace more that 80% of your income.
After you figure out what type of life you want to lead in retirement, you’ll be able to use one of our calculators to figure out how much you’ll need to save to reach your goal. Once you have that number, you can use it to determine how much you are going to need to save each year to reach your goal. You can then compare those results to how much you are currently saving. If you are ahead of the game, then congratulations! You might be able to retire earlier than you thought, or perhaps you can take that vacation you have been daydreaming about.
If you’re behind where you need to be to reach your goal, it’s time to take a look at how you’re spending your paycheck. There are some easy fixes like drinking the office coffee instead of buying a latte at Starbucks every day, and there are also some bigger fixes like moving to a smaller house or buying a smaller car. But no matter what position you’re currently in, starting now is always a better option than continuing to put off thinking about it.
So back to the marathon… My goal is to run it under 3 hours and 45 minutes which is right around 8 minute and 30 second miles. I’ll keep you updated as my training progresses (the marathon is on November 2nd). If you have any tips for how to prepare for a marathon, I’d love to hear them. Meanwhile, if you have any questions about how to start a retirement plan let us know. We’ll answer your questions as best we can and will try to post our answers here to help others that might be in a similar situation. No question is too small or simple –we’re all beginners in something. For me it’s running… What is it for you?
Scott H
