12/24/12

Unfortunately, financial planning not a high priority New Year’s resolution for most Americans

As my practice grows, both in number of clients and the ages of new clients at both ends of the spectrum, I am consistently amazed at how many say that they never thought about using the services of a Certified Financial Planner™.  In a survey by Allianz Life Insurance Company, 84% of Americans will not include financial Planning in their New Year’s resolutions.

The #1 reason why people did not include financial planning in their resolutions was their belief that they don’t make enough money to worry about it.

“It’s alarming that Americans’ willingness to ignore financial planning in their New Year’s Resolutions continues to go up year after year,” said Katie Libbe, vice president of Consumer Insights for Allianz Life. “With the responsibility for retirement security shifting from employers to individuals, people need to become more, not less, active with financial planning to ensure they have enough money to fund a retirement that could last up to 30 years.”

Unfortunately, when respondents were asked how likely they are to seek advice from a financial professional in 2013, more than a third (36 percent) responded “less likely,” up 5 percent from 2011. Only 20 percent said they were “more likely,” matching 2011, while 44 percent noted they were “unsure,” down 5 percent from the 2011 survey.

In typical American fashion, we have big desires for health and wealth, but do little to do the work necessary to achieve these goals.  It’s easier to dream about the great abs but don’t do the sit-ups required.

For the second straight year, “health/wellness” topped Allianz Life’s survey as the most important focus area for the upcoming year. Forty-four percent of respondents made it their top selection followed by “financial stability” (31 percent), “employment” (15 percent) and “education” (6 percent).

If you know of someone who truly needs to establish good financial habits, which include working with a Certified Financial Planner™, please pass on this week’s email which includes links to articles about working with financial advisors.

I want to wish you a wonderful holiday season and a prosperous New Year.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

 

12/11/12

Others may follow IBM’s lead of only an annual 401(k) match

Just about every other company in America will be watching with great interest the changes which IBM just announced.  On December 6th, the Wall Street Journal reported that IBM will be overhauling its retirement program to contribute only once a year to employee 401(k) accounts in a lump-sum payment instead of twice monthly.

Starting next year, IBM’s contributions, which generally range from 6% to 10% of pay, will take place on December 31st.  Workers who leave the company before December 15th won’t qualify for the match, unless they retire. IBM’s switch is very critical since it is the latest in a series of changes which major US companies have been making in order to reduce retirement-plan expenses.

This particular change has major financial implications for employees in two main ways. First any change in employer matching programs has a direct correlation to employee participation in the company’s 401(k) plan.  Secondly, by only making a single annual investment, employees miss out on the benefits of an investment concept called, “dollar-cost averaging.”

Correlation between Employer Match and Employee Contributions to 401(k) Plans:  During the recent recession, many employers reduced or eliminated their 401(k) matching programs.  In fact, some of them have only partially restored them.  In 2011, 7% of employers made no contributions at all to their plans, up from only 2% of firms not making any matching contributions in 2001, according to benefits consultant Aon Hewitt.   During the recession, employees with firms who cut their match saw employee contributions to their 401(k) plans drop as well.  Further, workers are less likely to even join a 401(k) plan if there’s no employer match. A Fidelity Investments report showed that about 30% of employees who participate in a workplace retirement plan contribute only the amount they need to get the full employer match.

Benefits experts say IBM’s shift could start a trend among other large employers. Earlier this year Ford said it would offer retirees a lump-sum payout to offset its pension obligations.  GM and about a dozen other companies quickly followed suit, according to the Pension Rights Center, a Washington, D.C., advocacy group.

For IBM, the latest move could help save millions of dollars a year in compensation expenses, and keep valued workers who want to ensure they receive the match more tethered to their jobs—at least until the end of a given year.

Employees Lose Out on the Benefit of Dollar Cost Averaging:  If more companies follow the lead of IBM, then more employees will lose out on one of the big advantages of 401(k) plans: “dollar-cost averaging.”  Dollar cost averaging is an investment strategy in which investors buy stock and bonds at multiple prices over time.  This levels out risk and return for the investor.   There is an article which you can review which discusses this concept further.

When applying the concept of dollar cost averaging to a 401(k) plan, it is of particular concern to older workers who are closer to retirement and have less time to make up for short-term losses.  It is also a concern to all workers at any age since everyone will miss out on the potential market gain on stocks and interest earned on bonds

All told, only 9% of employers pay out their 401(k) match once a year and 84% payout the match with each pay period, according to Aon Hewitt.

The bottom line to learn from today’s message is this, employees should keep saving as much as possible in their retirement accounts, especially tax advantaged ones like 401(k) plans.  At the end of the day, saving for retirement is our responsibility, not the company’s responsibility.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®