Leaving 401(k) Behind After Job Change Could Be Costly

By Arielle O’Shea, April 26, 2016, Nerdwallet.com

We’re a nation of job hoppers:

According to the latest data from the Bureau of Labor Statistics, wage and salaried workers have been with their current employers a median of just 4.6 years. The average baby boomer, based on a group tracked beginning in 1979, held just over 11 jobs between ages 18 and 48. The kicker: Nearly half of those posts were held by age 24. Those younger years are golden when it comes to saving for retirement, so leaving a job behind is fine, but you’d be wise to take your 401(k) with you.

The truth about 401(k) fees:

We’re big fans of 401(k)s for a couple of reasons — the main one being matching dollars. You may have heard this referred to as free money, and that’s because it is. Many companies with 401(k)s offer some sort of match, ranging from 25% to 100% of employee contributions, up to a limit. The second benefit to 401(k)s is their high contribution limits: In 2016, you can kick in up to $18,000 ($24,000 if you’re age 50 or older). That limit doesn’t include matching dollars.

But these accounts aren’t without their faults: They’re often very expensive. A combination of high administrative costs for running the plan and a limited investment selection makes it tough to find competitive expense ratios when selecting your 401(k) investments. An expense ratio is the percentage of your investment that goes toward the cost of running a fund.

Compound interest means a dollar saved early on is worth much more than a dollar saved later. But the same phenomenon can work against you. Investment fees like those tied to 401(k)s are compounded over time, and the longer you pay them, the more you’ll lose. The average American couple forks over roughly $155,000 in retirement fees over a lifetime, according to public policy organization Demos, amounting to nearly a third of their investment returns.

What to do with your 401(k) when you leave a job:

It’s easy to pack up your desk on your way out the door, but a 401(k) can’t be thrown in a box. Maybe that’s why nearly 30% of us leave these behind. That’s a mistake, due not only to those fees, but also to the fact that you’ve essentially removed yourself from that account. Not only will you lose the support of the plan provider, you may not be informed about plan changes, including potential fee increases or investment options — especially if you fail to keep on top of it or you move and the old employer loses track of your information.

So what do you do with it? The best course of action, in most cases, is to roll over that 401(k) to a traditional IRA or a Roth IRA. You’ll pay taxes on the rollover to a Roth, but you’ll be able to pull money out tax-free in retirement. By rolling over, you’ll also spare yourself some administrative hassle, particularly if your future includes many jobs. Planning for retirement is infinitely easier when all of your money is in just one or two accounts. You’ll be able to quickly get a handle on how much you’ve saved so far, which is key to getting an accurate result from a retirement calculator.

Don’t make a 401(k) rollover mistake:

To avoid a tax fiasco, you’ll want to make sure you initiate a direct rollover, rather than having a check made out to you in the amount of your account balance. Your new IRA plan provider will be glad to walk you through the process, but in general, you’ll open the rollover IRA, then contact your old 401(k) plan provider. Give the old company that new account information and request a direct rollover. The 401(k) company will then transfer the funds or send the new provider a check for the balance.

Whatever you do, don’t take the money as cash, to be turned into a car, TV or new pair of shoes. The return on investment is bad, you’ll give up that aforementioned compounding, and you’ll owe harsh taxes and penalties for the early distribution.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Net Worth Should Not Be A Mystery To Millennials

By Bobbi Rebell, April 26, 2016, Money Magazine

Ignorance is not bliss when it comes to one big number for millennials: their net worth. The vast majority of millennials (73 percent of those 18 to 34) have no idea what they have versus what they owe, according to a new survey from Harris Poll conducted for online money manager Personal Capital.

John Piazza admits he is one of them, although the Chicago-based banking executive says he has a “decent idea” of his net worth (assets such as cash and mutual funds minus liabilities like student and credit card debt). Piazza estimates that about 80 percent of his friends do not have a handle on their total financial picture.

“It’s time-consuming to gather all the disparate information together initially, and then it’s a laborious process to update it going forward,” Piazza says. While it may be a hassle, not knowing where you stand now makes it much harder to plan for where you need to be later in life, especially for retirement, says Kyle Ryan, a certified financial planner, who is the head of advisory services at Personal Capital.

It is even harder to get a handle on the numbers for those who have an outsized vision of what they might inherit down the road – which might dim their motivation to save now. The Personal Capital survey on retirement readiness found that millennials expect to inherit about a million dollars, on average.

The average inheritance in the United States is just $177,000 according to a 2013 HSBC survey. Counting on any kind of windfall, regardless of size, is a risky business. It certainly does not merit giving up on saving for retirement – as some 40 percent of millennials respondents did on Personal Capital’s survey by saying they had no retirement plan of any kind started yet. Some wealthy families are not even planning on handing down their fortunes. Big names from Warren Buffet to Bill Gates, to Kiss rockstar Gene Simmons have all publicly talked about giving the vast majority of their wealth to charity – not to their kids.

“I’ve worked with many high-net worth individuals, who behind closed doors admit openly that they have no intentions of actually leaving a large sum of money to their children, nor to anyone,” says Shannah Compton Game, a Los Angeles-based certified financial planner who focuses on millennials. “This can be a rude awakening for a millennial who has planned on those funds to continue a lifestyle that they have been living.”

Here are three tips on getting your finances on track now instead of waiting for your retirement fund to be handed to you on a silver platter:

1. Do the math:

The average millennial needs to save upwards of $2 million to live a somewhat comfortable life in retirement, according to Compton Game.

2. Have a sit down with your parents:

Do not assume you know how much money they have, or that it is going to you. ”It can be a hard conversation to start, but it’s easier than having an expectation that isn’t fulfilled,” says Game.

You also have to consider the timeframe involved and factor in the uncertainty. Typical millennials in their 20s today would have parents who are a long way from retirement and, perhaps, 50 years from dying.

3. Save more:

Even if your parents do intend to leave you an inheritance, saving money should still be your top priority. Build a solid emergency fund that can cover three-to-six months of expenses in a high-yield checking account. And contribute to some kind of retirement plan; even if your employer does not offer a 401(k) there are options for IRAs.

If you started contributing $100 a month at age 25 to a traditional IRA, and got a very modest 4 percent return, you would have more than $118,592 before taxes if you retired at age 65.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Student debt has multi-generational impact on financial wellness

By Sheryl Smolkin, April 27, 2016, Employee Benefit Advisor                                                                

Student debt is not only affecting millennials who are stressed about their finances and distracted by money issues when they are at work. Outstanding student loans are also affecting baby boomers who may be helping their kids to pay down balances owing instead of saving enough money to fund their own retirement.

A new study conducted by PricewaterhouseCoopers reveals that for the fifth year in a row, employees say their top two financial concerns are not having enough emergency savings for unexpected expenses (55%) and not being able to retire when they want to (37%).

However, millennials – who in 2015 surpassed Gen X to become the largest share of the U.S. workforce – tend to be in worse shape than their older counterparts. Nearly half of the full-time employed millennials surveyed find it difficult to meet their household expenses. Forty-two percent of millennial employees have student loans and 79% reported that their student loans have a moderate or significant impact on their other financial goals.

In addition, more than one in four of all employees (37% of millennials) report that personal finance issues have been a distraction at work (up from 20% last year) and 46% of those who are distracted by their finances at work say that they spend three hours or more a week thinking about or dealing with personal finance issues on the job.

The 2016 survey digs a little deeper into the student debt issue than previous reports, says Kent Allison, PwC’s national financial wellness practice leader Kent Allison. “We stripped out that audience vs. everyone else to determine the impact of student debt on millennials,” he says.

Millennials with student loans disclosed they are consistently stressed about their finances (81% of millennials vs. 46% of all employees), carry credit card balances (72% of millennials vs. 46% of all employees) and use credit cards to pay for monthly necessities because they are unable to afford them otherwise (41% of millennials vs. 21% of all employees).

“Millennials are not necessarily making wise choices. Other PwC research shows that as a result of their cash flow challenges, they are heavy users of alternative financial services like pay day loans,” Allison says.

“Running out of money is the baby boomers’ biggest concern about retirement, followed by health issues and healthcare costs.” And millennial student debt is also having a surprising effect on their parents, with 80% of baby boomers saying that student loans are having a significant or moderate impact on their ability to achieve other financial goals. “There are people who are paying off student debt for their kids at the expense of saving for their own retirement,” says Allison. “We’d probably advise them to get their retirement in order first and then go back and help out their kids.

In fact, employees surveyed disclosed that running out of money is the baby boomers’ biggest concern about retirement, followed by health issues and healthcare costs. Yet the majority of employees are not taking advantage of contributing to their health savings accounts and only 18% plan to use these funds for future health costs in retirement.

Also, of the 61% of baby boomers who plan to retire within the next five years, less than half of them know how much they will need at retirement. Moreover, excluding the equity in their homes, only 50% of baby boomers have accumulated as much as $100,000 in savings.

In addition, 26% of baby boomers have already withdrawn money held in their retirement plans to pay for expenses other than retirement and 36% think it’s likely they’ll need to use money held in retirement plans for expenses other than retirement. Forty-eight percent of this group believe they will have to push their planned retirement date into the future because they will not have saved enough money to stop working.

“Furthermore, when you look at the aging employee, the percent that are now supporting parents or in-laws has risen from 16% to 22%. I also saw a statistic a few years ago that retirees are the fastest growing population declaring bankruptcy,” he says. ”Going forward, employers will no longer be able to simply issue a total rewards statement that says ‘here are the benefits we provide and how much we pay.’”

Allison acknowledges that many employers offer a rich array of benefit plans to facilitate employee financial wellness, but he suggests that, overall, employees do not use these plans in the most effective way.

“Matching benefit needs to the needs of particular employee demographics in a more targeted and proactive fashion will help employees use their benefits more frequently and appropriately, he says. “I think going forward, employers will no longer be able to simply issue a total rewards statement that says ‘here are the benefits we provide and how much we pay.’ It’s really about delivering to individuals the information, education and guidance around a particular benefit that matches their particular need.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


‘Alternative Work Arrangements’ are now 16% of the Workforce

By Alicia Munnell, April 28, 2016, Marketwatch.com

Increasingly, commentators refer to the “gig economy,” suggesting that large numbers of workers get a series of short-term jobs through a mobile-app arrangement. Larry Katz (Harvard) and Alan Krueger (Princeton) designed a questionnaire to provide the first nationally representative survey-based estimate of the percentage of the workforce engaged in gig-type activity. They found that only 0.5 percent of all workers identify customers through an online intermediary such as Uber. In the process, however, they uncovered a much more profound shift in the U.S. workforce.

Updating the Bureau of Labor Statistics’ (BLS) Contingent Work Survey, which the agency has been unable to conduct since 2005, the researchers found that the percentage of workers engaged in alternative work arrangements – defined as temporary help agency workers, on-call workers, contract company workers, and independent contractors – rose from 10.1 percent in 2005 to 15.8 percent in late 2015.  This increase is dramatic given that the BLS survey showed virtually no change between 1995 and 2005

The fact that a growing group of workers does not have a traditional employer/employee relationship has enormous implications.  In the United States, most forms of insurance are provided through the workplace. If workers have no employer, they have no one to contribute towards worker compensation in the event they are injured or unemployment insurance in the event they lose their job.  Even more important, these individuals with alternative work arrangements are not automatically provided health insurance, albeit the Affordable Care Act has made it easier for them to acquire health insurance through an exchange.

To someone like me with a laser-like focus on retirement, the most obvious and serious loss for this 16 percent of the workforce is that they are not enrolled in a retirement plan.  And the evidence clearly indicates that people do not go out and open up an Individual Retirement Account on their own.  Moreover, I’m afraid that these people with alternative work arrangements are not going to be picked up by the state savings initiatives underway in California, Connecticut, Illinois, and Oregon. Those initiatives impose a mandate on employers that are not providing a plan to automatically enroll their workers in an IRA.  The people with alternative work arrangements do not have an employer. Other routes exist for coverage, but it will not happen without some special effort.

An important question is whether this shift towards alternative work arrangements is a one-time event or the beginning of a trend.  The answer depends importantly on why the shift is occurring.  On the supply side, Katz and Krueger note that alternative work arrangements are more common among older and more highly educated workers, and the workforce has become older and better educated over time.  But this factor, they conclude, explains only 10 percent of the increase.  Similarly, people could simply prefer more flexible work arrangements and these arrangements are more feasible in the wake of the ACA, but that increase seems very large as a response to the availability of health insurance outside the workplace.

On the demand side, employers may prefer these new arrangements because they do not have to share profits with the workers.  Or more importantly, employers may be responding to technological change, which standardizes job tasks and makes it more feasible for them to hire and monitor contingent workers.  All these explanations suggest the trend will continue.

The only argument for a one-shot event is that the dislocation caused by the Great Recession forced workers to accept other arrangements when traditional jobs were not available. We will know more in 2020.  If the government does not have the funding to undertake the survey (a ridiculous state of affairs!), I hope that Katz and Krueger update their important study.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®