Should 401k Plans have only Index Funds?

A nice article about how 401k plans are better off with only index funds.  I do have a quibble with the article.  Index funds generally outperform actively managed funds over the long run due to their lower fees.  Looking at the last 10 years, all of the index funds I have recommended for 401k plans have performed in the top half of their peer group, and most in the top third, due to significantly lower fees.

A Random Walk Down Wall Street — A Great Read

Listen to this interview with the author of A Random Walk Down Wall Street. The book explains the basics of investing in a very simple way and cuts through a lot of investment myths and hype. http://www.npr.org/2015/01/19/377698238/markets-may-stumble-or-skyrocket-but-this-economist-says-hold-on-tight

When should I move my 401(k) over to my new job?

This is a repost of a recent question I answered on NerdWallet

 That is a great question that I get often.  There are a couple of things to think about.

In most circumstances rolling your old employer plan into IRA is probably the best option.  That option allows you to access low cost funds from places like Vanguard and Fidelity that may not be available in your old employer plan.  It also makes it easier for you to keep up with the money, if you change addresses etc.

If you are thinking about rolling your old employer plan to a Traditional IRA and your Adjusted Gross Income (at the bottom of the first page of your tax return) is more than about $112,000 (single) or $178,000 (married) and you do not have a Traditional IRA now, you may want to skip rolling over your old employer plan into a Traditional IRA.  Keeping that money out of a Traditional IRA allows you to make a tax-free “back door” Roth IRA contribution by contributing to a Traditional IRA and then immediately converting it to a Roth IRA. In that case you would move your old 401k plan balance directly to your new employer plan if it had lower cost options than your old plan, or leave it at your old plan if the opposite were true.

On the small chance that your old employer 401k balance was in a Roth 401k, I recommend rolling the balance directly into a Roth IRA and not into your new employer plan.

I hope this helps.

View the original post on Nerd Wallet

Is Your 401k Plan a Rip-off

The PBS show Frontline aired a great piece last week about 401k plans called “The Retirement Gamble.”   The show exposes some of the excessive fees that 401k plan providers charge, and the lengths they go to hide them from employees and their employers.

If you are an employer or employee that thinks that your 401k plan provider may be charging to much, or you do not even know how to figure that out, you can go to www.brightscope.com to check out how your plan stacks up.  Or you can contact me if you would like me to review your plan and show you some better options.

Creating a More Tax Efficient Portfolio

Here are some simple tips to create a more tax efficient portfolio:

Invest in Index Funds

Index funds generate lower short-term capital gains and higher long-term capital gains due to much less frequent buying and selling.  Short-term gains are taxed every year as ordinary income.  Long-term gains are taxed at lower capital gains rates, and most are only realized when you sell your shares.

The idea here is to place assets that produce higher income (e.g. bonds) in tax advantaged investments (IRA, 401k) that will allow you to not to have to pay taxes annually on the income.

Then putting assets that generally produce less income (e.g. stocks) in taxable accounts.  You will have lower taxes each year, and when you sell your shares you will pay the lower long-term capital gains rate on your profits.

What about Roth IRAs and Roth 401k Accounts?

Since any gains in these accounts are tax free when withdrawn, it does make sense to put assets that will have the highest long-term growth in these accounts as well (e.g. stocks) as an exception to the rule above.

Caveats

It will often not be possible to execute this perfectly with all of your income producing assets neatly tucked away in your Traditional IRA and your growth assets in your Roth IRA and taxable accounts.

Also please do not let the desire for tax efficiency overwhelm having the right asset allocation for your long-term needs.  Tax efficiency is really a tactic not a strategy.

 

Vanguard Changing the Indicies Used

Vanguard announced they are changing the incidicies they use to construct some of their most widely held funds including the Vanguard Total Stock Market Index, The Vanguard International Stock Market Index, and the Vanguard Total Bond Market Index.  Instead of following the Morgan Stanley Capital Indicies (MSCI), domestic funds will follow the University of Chicago’s Center for Research in Security Prices (CRSP), and international funds Financial Times and Stock Exchange (FTSE) index.  The reason for the shift is to lower the ongoing fund fees.  The new indicies charge a lower licensing fee then than the current MSCI ones do.  Vanguard does not anticipate a major change in the composition of most of their broad based index funds.  They also do not anticipate signficiant capital gains distributions from the switchover.

The only possible hiccup involves South Korea.  Right now it is in the MSCI emerging market index.  FTSE has it in the developed market index.  If you own the Vanguard Total Stock Market Index or both the Vanguard Developed and

This is not the first time the Vanguard has shifted indicies, for example the Vanguard Total Stock Market Index moved from following the Wilshire 5000 to the MSCI index in 2005.

New 401k Plan Disclosure Fees – An Eye Opener for Small Business

May 21st, 2012

After many delays, 401k plan providers and advisers will finally have to begin disclosing their fees. Some of these fees may come as a shock to some employers who were told that their plans were “free.”

Providers will have to disclose what the administrative fees are for the plan even if they are bundled into the mutual fund expenses in the plan. Mutual fund fee will have to be disclosed to participants in terms of the annual cost per $1000 invested.

Many participants will be surprised to discover that they are paying 2-3% of their 401k plan balance in annual fees. High fee plans are often sold to small businesses that lack easy access to lower cost 401k plan solutions, and lack the expertise to decipher the hidden costs in a supposedly “free” plan.

Hopefully the new disclosures will serve as a wake up call for small business and get them to ask some tough questions to their plan providers. Read the article for more details.