Managing Risk
In this issue of the MaxOut Savings Report we will go over common problems in 401(k), 403(b), 457 and
other qualified plans. The credit crisis has caused huge damage to many 401(k) plans and setback
many people’s retirement plans. We have found, with some planning, your savings plan can be protected
from future crises. Managing your 401(k), 457 or 403(b) plan is all about managing the
rewards against the risk in your portfolio.
As more companies are eliminating their pension plans and converting
to a 401(k) or other qualified plans, it is forcing more employees to manage their own retirement plans. It
has been our experience that managing a 401(k) is not that difficult if many common mistakes are avoided. At MaxOut
Savings Advisors, LLC we have found that your savings rate is the biggest contributor and determinant of a successful retirement
plan. The next most important determinant is how you manage the assets in your plan. Remember,
a successful retirement now requires you to take charge of your retirement plan. Successful management
of your 401(k) requires a plan and avoiding these common mistakes.
1. Failure to Participate. This financial
crisis is no reason to not be participating in your company savings plan. If you quit participating in
your savings plan you will have a tough time saving for retirement. In some plans, fewer than 65% of the employees contribute
anything to their 401(k) plan. This is self explanatory; you will find it very difficult to retire successfully
if you do not participate in your company’s 401(k) plan. This is especially true now that many companies
have eliminated pension plans and have replaced it with a 401(k) plan. Some common reasons for not participating
are not having enough money, saving for a house, or fear of the stock market. There is rarely a good reason
to not participate in your company plan. If you are worried about the stock markets, you can put all new
money in a money market fund or stable demand option.
2. Not Saving Enough for Retirement. Your
savings rate is the single biggest determinant of a successful retirement plan. What is your savings rate
for your company plan? Are you saving enough for retirement? Our goal is to have everyone
saving at least 10% of their income plus the company’s match for retirement. If you are saving under
10% of your income, you should look at your retirement needs and run a calculation to see if there is a need to increase your
savings rate. Remember, even if one cannot get to the target savings level needed, every little bit helps.
If need be, increase your savings 1% at a time until you reach your target savings level. If you
are over 45 years old and are behind in savings, you should look to increase your savings rate to 15%. We
see many people saving 20% of their income to catch up as they get closer to retirement.
3. Not Collecting
Free Money. In most 401(k) plans, the company will match your contribution up to a certain percentage.
The match will typically be 50%-100% match up to a set point. This is like getting a bonus 50%-100%
return on your money; take advantage of the offer and collect all the “free money” offered. The
one caveat is that in many plans there is a vesting clause that requires a certain length of service to the company.
Remember, at a minimum, your savings rate should be at a level to collect 100% of that company match.
4. Failure to Manage Risk. The Debt Bubble should have taught most people this lesson.
Proper asset allocation is the hallmark of a good risk management plan for your
401(k). We asset allocate to grow the portfolio and, at the same time, reduce and manage risk.
We find that many investors tend to overweight stocks and do not have enough bond and cash components in their investment
strategy. What saved many investors in this recent market collapse was increasing the cash weightings in
their 401(k) plans. In 2008, cash, or money funds, was one of the very few assets that outperformed and
had positive returns. Your plan should have the proper mix of stocks, bonds, cash, and international assets
prudent for your expected retirement time frame. At MaxOut Savings Advisors, LLC we generally start with
a 60% stock and 40% bond weighting and adjust the asset mix from there. This mixture of assets reduces
the risk that any one asset decline will wipe out your investment portfolio.
5. Overweighting Company Stock
or Industry. The employees of Bear Stearns owned 30% of the company stock; after the firm collapsed
within one week, many of them were wiped out. The lesson learned from Enron was that it is dangerous to
have too much company stock in your 401(k) plan. We would recommend a maximum of 20% of your portfolio
in the company stock. This is higher than some recommend and takes into account the fact that some people
want to have a vested interest in the growth of their firm. In Houston, being an energy city, it is easy
to overweight the oil industry stocks. Still, this should be avoided; just look what happened in the technology
industry when the internet stocks collapsed. The 401(k) plan should be rebalanced quarterly to prevent
over allocation of your firm’s stock or industry.
6. Failure to Rebalance Plan. A
recent Fidelity Investments study of 401(k) plans found that 85% of the participants failed to make any changes or rebalance
their plans on an annual basis. In these uncertain financial times you should review, rebalance and make
any necessary changes on a quarterly basis. With the big swings we have seen in the markets over the last
six months, it is easy for your portfolio to become out of balance. As an example, if you have a 70% stock
/ 30% bond portfolio and the stock portfolio drops 50% and the bonds stay even, your new weighting is 53% stock and 47% bonds.
This portfolio now needs to be rebalanced to your new target weighting. The stock market has had
a substantial run from the 2009 lows and many plans need to be rebalanced. Some questions to ask:
- Are you over-weighted in any one asset class?
- Do you have too much in company stock?
- Do you need to have a more defensive portfolio given the times?
- Should you add to any sector that
looks promising or reduce any sector?
- How is my bond weighting?
- What is my international exposure?
Remember to rebalance your portfolio quarterly.
7. Annuity in your 401(k) or IRA rollover.
At MaxOut Savings Advisors, LLC we have more people come to us with annuities that they are unhappy with and
cannot get out of than almost any other concern. Many investors do not realize that they cannot get out of the annuity without
a penalty for up to 10 years. In some cases, the penalty to get out of an annuity early can be as high
as 10%. As a policy, Fidelity Investments discourages investing in annuities in IRAs and most qualified plans.
Every situation is different; generally however, all you are doing by placing an annuity in an IRA or 401(k) is increasing
your fees. Fees for an annuity can run over 3-4% vs. 0.75-1.5% for mutual funds, stocks and bonds.
It is rarely a good idea to put an annuity in a qualified plan.
8. Using 401(k) Plan as a Bank.
Using your 401(k) as a bank is an easy trap to fall into. It is rarely a good idea to borrow or get a loan from your
401(k). Your 401(k) is your last line of defense for retirement. For most savers, our
experience has been that finances are generally tight until they look up at retirement and have over $1 million in their company
plan! So do not touch your 401(k) plan until retirement and you will be grateful for the sacrifices you
are making now!
9. Forgetting to Rollover. Often times changing jobs is stressful and hectic; we tend to not worry about the old 401(k)
plan. When you change jobs, there are 5 things you can do with your company plan:
- Transfer Plan to new company
plan
- IRA Rollover and consolidate
with your IRA
- Annuitization
(income)
- Cash out or take
check
- Leave it in the old
plan
Once you are settled in the new firm, move the old plan over to your new firm or roll
it over into an IRA. An IRA Rollover is a good way to consolidate your old 401(k) and company plans.
Once the assets are consolidated in an IRA Rollover, they are much easier to manage. An IRA Rollover
can be set up at a bank, brokerage firm, or with an investment advisor.
10. Cashing Out at a Job Change. The quickest way to wreck your savings
program is to cash out of your old 401(k) when you change jobs. In addition to ruining your savings, you
will be taxed at ordinary income plus a 10% penalty.
11. Timing the Market. It is rarely a good idea to time the stock market
and very difficult to do successfully long term. Stick to asset allocation and picking good quality mutual
funds. If you are concerned about the markets, raise cash in percentages. This way you
are not making all in or all out decisions that could “freeze” up your decision making.
12. Too Aggressive or Too Conservative.
Over-weighting an investment could upset your investment portfolio if it were to go bad. A lesson
that should be learned is that no matter how sure the investment appears things can go wrong. At
the same time, all cash does little good long-term for your portfolio. Remember to work to achieve a balance
with your investments. Make sure that any one decision, if it goes wrong, does not hurt your overall savings
plan.
13. Investing in the “Latest Fad”
or Hot Mutual Fund. Stay away from the hottest mutual funds or stocks.
Many investors get caught up in the latest investment fads. Remember the Tech Bubble, Internet Bubble,
Junk Bond craze or my favorite the sub-prime mortgage bonds? These all ended with losses for investors.
After one or two years, it is very difficult to repeat hot sector performance.
14. Lacking an Investment Plan. Most
401(k) investors have no investment plan for their 401(k) plan. Draw up an investment plan detailing percentage asset allocation,
when to rebalance (quarterly) and maximum weightings in each asset class. This can be as simple as something on the back of
an envelope, for example: 60% stock fund, 40% bond fund. Or you can make the investment plan as complex
as you want to make it.
15. Have a Defensive
Plan. Two years ago in the MaxOut Savings Reports we talked about the Perfect
Financial Storm and the need to build a castle for your investments. As an example, set a stop loss at
a certain price for an investment if it goes bad. A stop loss is a set order or mental stop you use to sell an investment
if it goes against you to prevent further losses. You can set your stop losses at 10-20% or wherever you
feel comfortable. It could be as simple as raising cash levels to 20% if you become worried about your
plan investments. There was a reason that we said cash would be king for 2008. Remember,
the football teams that go to the Super Bowl are often the ones with a good defense. Defense wins championships
and reduces risk in investment portfolios. The key here is to have a plan of some type and not freeze up like many did during
the tech bubble collapse.
16. Lifestyle or Target
Funds, Know Your Risk. We are seeing a proliferation of lifestyle or target retirement funds.
A “lifestyle fund” is a fund that manages the risk of your portfolio based on how far along the retirement path
you are. As you get closer to retirement, they try to reduce the risk, generally by buying bonds.
Many people have met with us and have found that they have large losses in their 401k plan because they invested in
these funds and did not understand the risks involved in the fund or the investments it was making. You
cannot just turn your savings over to a “lifestyle fund” and count on them to protect your assets.
The key to using these funds is to understand what is in them. What is the weighting of stock to
bonds in the fund? Take a look at the write up on the fund and that will give you an idea. Generally, the
higher the bond component the more stable the fund. We have found that some of these funds had too much
exposure to high yield bonds that led to large losses in addition to stock fund losses in the portfolio. In addition, some
funds overweight bonds as your retirement date approaches, forgetting that you have an average 25-year lifespan after retirement
that you will need asset growth. Bottom line: take a look at the target or lifestyle fund and know what
they are investing in.
17. Goal: 10% plus match. The biggest mistake in a 401(k) plan is not setting a high enough savings goal.
According to a recent Fidelity Investments study of 401(k) plans, the average savings rate was 7.0% for 2006, this
is too low. For most people, their savings rate should be at least 10% plus the company match.
Always remember the key to a successful retirement plan:
Save Aggressively
and Invest Conservatively!
Managing
a 401(k) plan is all about managing risk vs. reward. Following these simple steps will help you get there. If
you are having problems or concerns, it is a good idea to get some help. A good place to start is with
your company contact for the 401(k) program. If they cannot help, they can point you in the right direction.
Retiring soon? Now is the time to set up an appointment with MaxOut Savings Advisors, LLC.
At MaxOut Savings Advisors, LLC, we work every day managing investors’ 401(k), IRA Rollover and Trust accounts.
If you need help or would like MaxOut Savings Advisors, LLC to manage your accounts, I would be happy to meet with
you. Email us at ted@maxoutsavings.com or call us at 713-627-0400.
Do you have an account at Fidelity?
Do you
already have an account at Fidelity Investments? Why not let the MaxOut Savings Advisors Team actively
manage the assets for you at Fidelity? We will make the investment decisions and you can sit back and relax.
We use the same value based investment strategies we talk about on the MaxOut Savings Show. In most
cases you can sign a simple form and we can use your same Fidelity account to get you started.
Considering an IRA Rollover?If you are retiring soon or considering an IRA rollover, let the MaxOut
Savings Advisors Team handle your IRA rollover. We can help you take advantage of the NUA tax break if
you have low cost basis stock in your company plan. We will sit down with you and go over your financial
situation and needs and come up with a plan. We will show you how we manage accounts using our value analysis
strategy to grow your investments and reduce risk.
MaxOut Savings Advisors: Actively Managing Risk
In these volatile times, investing your retirement funds can be difficult and time consuming. Is
your advisor looking at risk and actively managing your retirement? Hiring the MaxOut Savings Advisors team to manage your
money or IRA rollover is a great first step toward a successful retirement. MaxOut Savings Advisors, LLC
is an SEC registered, fee-only investment advisor based in Houston, Texas. Ted Geoca has over twenty year’s
of investment experience managing clients’ retirement assets. We invest in stocks, bonds and mutual
funds for our clients using a value analysis strategy that we have developed over the last twenty years. We
look at risk as well as return to actively manage your investments through today’s changing markets.
We use Fidelity Investments as the custodian for our clients’ assets. If you would like MaxOut
Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.
To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.
Remember Save Aggressively and Invest Conservatively!
Ted K Geoca
Doug Saam Kellan
Caldwell
President
MaxOut Savings Advisors, LLC
Houston, Texas
ted@maxoutsavings.com
713-627-0400
www.maxoutsavings.comRemember to catch:
The
MaxOut Savings Show with Ted Geoca on Saturday at 11:00am
on KNTH 1070AM!
The MaxOut Savings Show and Report does not give out financial advice. Any recommendation may not be suitable for all investors. Moreover, although information contained
herein is believed to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC may
or may not have positions mentioned herein. MaxOut Savings is a Registered Investment Advisor registered with the SEC. You
should always make investment decisions based on your own financial situation.
To
sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email
ted@maxoutsavings.com.
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