What Does Your 401k Statement Tell You?

Hint: it’s not what you need to know.

It may be tempting to look at your 401k account, especially when markets go haywire. Before you do that, you may want to ask what you’re looking for.

If it’s just idle curiosity and you have some time to kill, there’s nothing wrong with looking at your account and reviewing statements. However, if you intend to actually do something, you’d better be careful.

Your 401k statement shows your account balance. You already knew that, but it may be novel to consider what is missing on those reports: your retirement income. Sure, some 401k and IRA providers print a retirement projection, but many don’t (and they’re usually not customized to you and your life).

What About Income?

Retirement income is probably the reason you have a 401k. Decide whether or not you think that’s true. Then, decide if you have a 401k for any of the following reasons:

• To watch it go up and down
• To only see it go up
• To “make money”
• To do better than your neighbors
• To be a smart investor
• To not make mistakes

It’s your money, and you can have any number of goals. Who’s to say if any of those goals are bad ones?

For most people, retirement income is the goal that matters. When it’s 3AM and they’re worried about money, they may be afraid of the market going down further. At 8AM, after a cup of coffee (and a muffin to help make better decisions), they’ll hopefully realize that the real problem is retirement income.

Looking at your 401k statement probably won’t help you get a handle on retirement income. For younger and/or aggressive investors, looks may be deceiving; a bad market is a good thing if you’re buying and not looking to retire anytime soon.

An account balance going up and down hardly tells you what you need to know. Zoom out and think about all the moving parts before you decide to do anything. Whether or not you take action, you’ll improve the chances of doing the right thing.

The New Merlin Mann and Authentic Happiness

It may not be anything new, but I see him in a new light. Why might you care? You might get ideas that improve your life and finances.

If you’re not familiar with Merlin, he’s made a name for himself in the world of personal productivity. But that’s probably the least important of his work. Increasingly, he seems focused on doing things well (not just efficiently) and bringing authenticity into our lives. And he’s kind of entertaining.

The type of authenticity can turn out to be essential to your financial strength. For example, it touches:

• Your job - what you do and how you do it
• How much you spend
• How much you save and invest
• Your goals for the future
• How much you enjoy all of the above (your experience of it)

The Goal Behind the Goal

Unless you understand what you do and why you do it, no amount of working, saving, and investing will make you happy. And that’s the real goal right?

If you’re not happy with what you do for a living or how each day goes, what’s the point? You can't buy happiness. You might not even make it to retirement age - stress will take you out before you even get close.

Get excited about stuff and do that stuff. The success (whatever that is), most likely, will follow. Yes, it sounds a bit on the new-age-motivational side, but it’s probably true. And if it turns out not to be, you’ll still enjoy the ride more.

In my mind, Merlin stresses the importance of why you do things and that you do them - not so much how you do them. Wanna get in shape? Move your body. Unfortunately most of us are more prone to fall into traps:

• Thinking about how and where we’re going to exercise
• Reading about how to exercise
  
• Setting up a place to do it
  
• Getting equipment (shoes, socks, sweatbands?) dialed in so we can work out
  
• Designing a program to motivate and track progress
  

Some of those things have to be done from time to time, but not at the expense of moving around.

So… How's this About Money?

Why is this on a site about personal finance? It could be related.

Personal finance is about spending less than you earn, saving and investing, and enjoying life. Unfortunately, readers often get stuck:

• Reading mass media (which is all news but never new)
• Picking up tips and tricks to save a little money
• Analyzing numbers and things they have little control over, and which may not matter over the long term
• Finding things to hate without understanding them (which makes the required behavior less likely to happen)

Again, these things may have to happen periodically. However, if you spend too much time on them you’re a researcher or a professional - not a saver. Or you might be evading something else…

If you want to hear interesting things from an interesting person, try some of the links below. You don’t have to be a creative person or knowledge worker to get something out of it. You can even consider the basics of handling your finances as a “project”.

1. Fake Rocks, Salami Commanders, and Just Enough to Start
2. Audio and Video (or just a recent talk)
   
3. Write online? Try to be Better (I don't know if I am but I think I try)
   

Target Date Funds Compared

Morningstar took a good look at target date funds recently, and listed the pros and cons of these controversial investments. The study looks at returns, fees, philosophy, and more in hopes of identifying the best target date funds and best ways to build them.

They end up straddling the fence between those who’d like to burn target date funds at the stake, and those who think they’re good enough as is.

Ultimately, the report may show that it doesn’t matter much which one you use. If we agree that investor behavior is more important than investment selection, than that’s no surprise. Even if you pick the best fund, you can be disappointed.

Good behavior includes having some understanding of how your fund works. There’s no real standard for these things, so a 2015 fund (which you might guess is a conservative one) can have anywhere from 36% to 84% in stock! 84% is usually not considered in the same zip code as conservative. It might be perfect - or it might not - but it’d probably surprise most investors.

Shining a Light

The study acknowledges that it isn’t taking a stand on either side of the target date fund debate. That’s OK. We’ve got more information, and that can only be a good thing for everybody involved.

More scrutiny led some target date funds to lower fees. Increased scrutiny means they’ll have to be even more competitive - not just in fees, but in a variety of ways that should benefit consumers.

These things are like vital organs; they’re supposed to do a good job by themselves and we don’t want to think about them unless something is wrong. They’re made for people who don’t or won’t spend all day messing with their investments.

Fund A or Fund B?

For most people, saving and investing is more important than picking a target date fund. Even worrying about strategy and philosophy may be a waste of time. The Morningstar study didn’t find huge advantages in active/passive, open/closed architecture, or other areas marketing campaigns hammer on.

Granted, the study is young so in future years the advantages may emerge. However, I doubt you’ll ever hear a retiree on the golf course say “I’m sure glad my target date funds were passively managed, otherwise I’d be eating dog food.” Now, you might see this on a commercial...

Look at today’s retirees; can you imagine one of them saying “I’m glad I had the stockpickers at American Funds instead of those silly Vanguard funds”? The only reasonable thing a successful retiree can say is: “I’m glad I saved and invested wisely”.

If they’re honest they’ll probably tell you they didn’t really look at - much less understand - exactly how the funds worked.

Getting a Refund? How's it feel?

Hopefully your taxes are done by now.

This time of year everybody talks about tax refunds. Whether it makes sense to get one or not, a “tax-free loan to the government”, and so on.

It’s worth looking at the financial reasons for and against getting a refund. In general, you should probably try to pay just about as much as you owe over the year. One way to do that is to use the IRS withholding calculator where you can fine-tune how much your employer sends them each month.

It’s also worth looking at non-financial reasons. Why do you do what you do?

Some people enjoy getting a refund. They feel like it’s a “prize” after the end of the year, but that’s not quite accurate. It’s your money, and it always was. If you’re going to use it for a treat, why not just budget for treats instead? Go ahead, you’re worth it.

When you owe, things can get ugly. This may be why so many people err on the side of getting a refund. We tend to dislike losses more than we enjoy gains (even when the dollar amount of each is equal), and owing at tax time can feel like a loss.

These days you aren’t missing out on much by getting a refund. The bank would have paid you very little on any savings. But it’s still worth aiming for (more or less) accurate tax payments throughout the year. You’ll force yourself to understand your income, expenses, and taxes as you fine-tune your withholding - and knowing more about how your money comes and goes is always a good thing.

Live From the Floor of the Exchange

Should you care? News outlets show reporters at various exchanges (NYSE, Chicago Merc, etc), promising to reveal breaking news.

However, those reporters are the last people who’ll hear about it.

Most things are electronic these days, and you’ll have access to better information if you’re in front of a computer. Anywhere. You might need a fancy subscription to get nitty-gritty details and bid/ask spreads, but most people get more than enough information for free.

On the Floor

The floor of an exchange is a fascinating place.

Traders may have valuable insight that could help make short-term decisions, but it’s not that valuable. Think about it: how long will it be obvious to a floor trader that a stock was going to skyrocket (more than about 10 seconds)? In short order, the opportunity is gone.

If there’s a reporter bumbling around trying to get information, any trader with valuable information is too busy to provide it. Especially to a guy on live TV.

Why the Field Trip?

Why do they send a reporter to the exchange? If he’s just standing in the way, wouldn’t it be better and cheaper to keep him at the studio?

The Last Psychiatrist explains it well, so you can read more there.

The news media are interested in keeping your eyeballs on the screen, not your success. They want you to believe you constantly have to “do something” with your investments. They want investing to be like flossing - something you to do every day or you’ll have an increased risk of heart problems and bad breath.

Imagine the following report from the exchange:

“If you’re not going to spend your money in the next few years and you’re not a day trader then there’s not much happening, really. Go give your kids a hug and maybe take ‘em to the park. You probably did a good job setting up your portfolio, and you reviewed it a few months ago, so I’ve got nothing. Sure, a few stocks are gonna go up and down but what else is new?”

You’d never tune in again. You’d also have a better chance of reaching your long term goals and keeping up with your own investments. Most importantly, you’d have more time and energy for more important things.

If they actually provided valuable insight, you wouldn’t have to suffer through the painful advertisements that keep them on the air. It’d be worth paying to watch.

Best Days Over for Bonds? What's Next?

Last week bond guru Bill Gross voiced concerns about investors who’ve fled to bonds in the past year. He thinks they’ve “seen their best days” according to a Bloomberg report.

His fund, the PIMCO Total Return fund, is now the largest mutual fund in history. You have to hand it to him for being honest when it may mean less money in his product. Let’s hope his worries affect how he manages the fund.

Why All the Bonds?

Why have investors piled into bond funds like his? They didn’t like what was happening in stock funds. With miserable rates on money market funds and bank accounts, some also reach for a little more return by using bonds. Those are safe, right?

They tend to have less risk than stocks. Safer issuers like the US Government and other well-funded entities are reasonably likely to pay off bonds.

What’s the Concern?

Bond prices (not the interest payments or values at maturity) can move up and down over time as they’re traded on markets.

Bond and bond fund prices can suffer when interest rates rise. Think of where rates are now and if they’re likely to go up or down. We can’t know if or when rates will rise or how any investment will be affected, but odds are good that longer term bond funds will face hard times.

Some use “duration” as a way to gauge risk; a one percent rise in interest rates may result in a percentage loss equal to a fund’s duration. If the duration is 3, a 1% rate increase means you should brace for a 3% loss. Sometimes it doesn’t work out that way but it’s a rule of thumb.

There are lots of pictures and formulas here if you want to dig into this.

So What?

Over the long term, it may not matter. But PIMCO Total Return didn’t get to be the largest fund in history by people thinking about the long term.

This may be nonsense, but see what you think:

1. Stocks lost money in the dot-com bust
2. People flocked to real estate because it was doing better
3. Real estate lost money in the subprime crisis
4. Briefly, people flocked to banks and short term treasuries for safety
5. People move to bonds because they’re “doing better”
6. Interest rates will rise someday
   

Is there a pattern here?

It’s not that you shouldn’t own bonds. Just consider why you own them.

401k Money Markets - Losing Money

One of the safest investment options in the 401k, some money market funds are losing money.

Increasingly, investors in 401k money market funds look at their statements and find they have less money than they put into the fund.

Negative returns in a money market fund? How can that be? It’s probably not due to market losses. Most money market funds manage to keep the share price at a constant $1 per share.

The cause is low returns combined with fees.

Sign of the Times

It’s hard to make money in a money market fund these days. Interest rates in general are low, and money market fund yields tend to move more or less with rates.

A money market fund is a mutual fund. No mutual fund is without fees. Managers have expenses, and they have to get paid. Money market funds are generally low fee funds, but miserable yields can lead to trouble.

Some money market funds and 401k providers have waived fees or subsidized the funds. Some have recently decided they can't afford to keep it up.

401k Money Markets

In 401k plans, money market funds have to overcome additional fees. A 401k is more expensive to administer than individual accounts, and you may be paying part of the freight.

Fees are not necessarily bad. If you get something of value, you should expect to trade something in return. This page isn’t about high 401k fees; you can find rants about 401k fees elsewhere.

Take those rants with a grain of salt. With a competent and attentive employer, it’s unlikely that your fees are too high. Ask for details if you want them, and expect honest answers. If you get anything else, get advice from the Department of Labor.

Even reasonably priced small 401k plans are seeing money market fund losses. Emphasis on the word “small”. Smaller 401k’s are more expensive than large 401k plans that can buy in bulk, so they’re most likely to have negative returns in the money market fund.

What to do, if Anything

There are several things you can do about money market fund losses. Before doing anything, consider why you are in a money market fund. The funds are generally suitable for more conservative investors and/or those with a short time horizon. Are you one of those? Should you be?

The easiest solution: do nothing and wait it out. If you belong in the money market fund, you’re getting low returns along with a low level of risk. While you’re losing money this year, you didn’t lose 60% a few years ago.

A short period of low-to-negative returns may not have a significant effect on your retirement income (supposedly that’s the goal of a 401k plan). Will it have an effect? Yes. Will it be significant? Only you can decide.

Fixed Accounts

Another solution: use a fixed account. Some 401k plans have a Fixed Account that currently pays more than the money market fund. The account, like a money market fund, is not guaranteed by any government agency; it has some risk, but not as much as the stock market.

Unfortunately, fixed accounts have restrictions. Just when everybody wants to jump into them (right now), interest rates are low. When interest rates rise, fixed-income investments suffer. You probably won’t notice losses, but the fixed account provider is likely to enforce restrictions.

Adding Risk

A third idea is to take more risk, if you're comfortable doing so. Don’t just do it because you hate losing money in the money market fund. Only do it if it makes sense with respect to your goals. You might look for ultra-short-term bond funds issued by strong organizations (like the US government). Longer term bond funds will suffer when interest rates rise.

If you want to spice things up, you can move to a more diversified mix of investments. Your plan may offer a “Conservative” fund that invests in a broad variety of places. You’ll have to look under the hood and decide if it is conservative enough for you.